The Indy 500 was late this year, rolling out in August instead of Memorial Day weekend. Still, I was touched by the tradition. Singing “Back Home Again in Indiana,” memorializing fallen soldiers, listening to “The Star-Spangled Banner,” and the call to “start your engines.” Watching the heady rush of race cars roar by at over 200 miles per hour.
Admittedly, I mostly took this “greatest spectacle in racing” for granted when I was growing up. We’d watch it on the TV at my grandparents’ rural Indiana home during our annual holiday rituals, but I wouldn’t pay much attention to racing the rest of the year.
This year, after so much has changed, I think we’re all finding comfort in these sorts of time-tested rituals. Similarly, at Grand Wealth Management, we’ve long emphasized the importance of having well-established principles, policies, and processes to “take for granted,” year after year. Especially when everything feels so uncertain, we believe these evidence-based rituals best position our clients for achieving optimal investment outcomes, come what may.
To illustrate, here are three examples of how our processes have stood us in good stead in 2020, helping us keep our clients focused on achieving their personal financial goals.
1. Rebalancing Rewards
When stocks plummeted in early March, many of our clients’ overall stock allocations drifted off-target, so we rebalanced those portfolios just prior to March 23.
This meant buying more stocks, guided by our thoughtfully designed processes. At the time, we did not know the markets would move sharply higher after March 23. We did know long-term historical evidence suggests maintaining your stock allocations according to plan offers your best (if never guaranteed) odds for a satisfactory outcome.
That same week, I was talking to a close college friend – an MBA and successful businessman. Confident markets would drop further, he was surprised we were buying more stocks.
Of course, my friend could have ended up being correct. But since none of us knows what the future holds, a disciplined strategy remains the most reliable choice in the face of uncertainty. In this instance, the favorable odds gave many of our clients an extra boost, enabling them to collectively recover several million dollars more in their portfolios than had we skipped the prescribed rebalancing.
2. Tending to Taxes
During the steep declines, we also guided our clients through taking advantage of the turbulence when appropriate by engaging in tax-loss harvesting within their taxable accounts.
Tax-loss harvesting is way to reap tax savings on market declines without substantially altering a portfolio’s structure. When an investment’s price drops significantly below the original purchase price, we can sell it, and immediately re-invest the proceeds in a similar (but not identical) investment. In a taxable account, this allows us to realize a capital loss, which clients can use to reduce current and future tax liability, often by thousands of dollars. Meanwhile they stay fully invested in the markets as planned.
Again, as good fortune would have it, we were not only able to harvest significant losses in early 2020, the market recovery was satisfyingly swift.
3. Doing Due Diligence
Just as we seek to manage our clients’ portfolios according to disciplined strategy, the fund managers we turn to for implementing those strategies must do the same. This is why we have a process for monitoring the investments we use. Following our process, we identified a global bond fund that had restructured to safer holdings, with lower expected long-term returns. As good fortune had it, a tangible reward was quickly realized by shifting to a different fund that more closely reflected our desired mix of short- and intermediate-term bonds. Fortunately, the immediate outcome was positive and resulted in a better result than if we had stayed put. Even had the short-term outcome been different, we achieved our critical aim of keeping our clients’ portfolios on track and invested sensibly toward their long-term goals.
Eyes on the Prize
As a result of the steps we have taken this year, and many others not discussed here, our clients can accomplish more for themselves, their family, and their community. Clients may give more to charity, plan a post-pandemic trip that has been on their bucket list, or perhaps provide more support for college savings. In our action-packed markets, wealth most often goes to those best prepared to stay on a thoughtfully designed course.
Helping families implement and adhere to a set of investment processes and procedures may not be as exciting as racing in the Indy 500. Though we find these evidence-based portfolio management rituals lead to good outcomes and provide peace of mind too. It takes a team effort to ensure the right things happen and we are proud to help people navigate through the uncertainty each day brings.