financial planner Stephen Zelcer
7 financial questions you are probably asking yourself right now

7 Financial Questions you’re probably asking yourself now

These past few weeks I’ve been fielding questions from financially conscious people who want to know how to navigate the current economic environment.  They know something big is happening but don’t know which way to run with it. They’ve heard the adage “when people are greedy, be fearful; When people are fearful, be greedy” but they want to know how to apply it.
Below are 7 financial questions you’re probably asking now and my answers. I hope this guidance helps you in these emotionally confusing times.

Note:  The article below is necessarily generic.  There will be exceptions to almost every point I make. Anyone who is serious about building wealth should discuss each of these points with their financial advisor.  Request an appointment here.

1. I’m nervous.  Should I sell to preserve what I still have, or stay put?
The short answer – stay put!
Warren Buffett amazingly described the stock market as “a vehicle to transfer wealth from the impatient to the patient.”  There is a tremendous transfer of wealth going on right now. You want to be on the receiving end, not the giving end. Assuming your investments were correctly positioned, you should absolutely NOT sell out of the positions you have now.  Patience will reward you handsomely.

2. Should I sell some of my conservative investments (G fund, F fund) and buy into the market now?
You may think, based on my previous answer, that not only should you not sell, you should consider buying.  But, that’s not true for everyone.
The only ones who should consider selling G fund and F fund to buy into the stock funds are those who had too much G fund or F fund to begin with.
When determining whether you have too much G or F fund, I try to assess two things:

  • How much risk can your stomach tolerate?
  • How much time, mathematically, does your portfolio have until you need this money?

I won’t be able to address your stomach issues in this article, but I can address the math.
My starting point is that anyone who has 10 years of time before they need to tap into this TSP money will not have to worry about this downturn.  This is 100% true for people who are still working and contributing to the TSP. For retirees who are no longer making TSP contributions, this is true 96% of the time.  With this 10 year window in mind, I approach the question (of selling G or F funds to buy into the TSP stock funds) based on your stage in career and distance from retirement. Below are 4 examples of people at different stages in their career – Retiree, New employee, mid-career, pre-retirement:

Retiree:  A retiree with a $500k portfolio, who needs $10k of investment income a year.
As a good general rule, a retiree should have at least 10 years of investment income set aside in G fund and/or F fund.  Anything beyond that can be used to buy into the stock funds now.
So, in this case, the retiree needs to already have at least 10 years worth of income set aside in the TSP bond funds (G or F).  10 years worth of income = $100k ($10k/yr x 10 years), and that $100k will buy them 10 years worth of time (and patience).
The remaining $400k can be invested in the TSP stock funds.  If their stomach doesn’t allow them, they need to speak to a financial advisor.  Their stomach may be costing them a lot of money.

New Employee:  A new employee with 30 years until needing their TSP, and $20k invested all in the G fund.  Such an employee really should consider a radical move of all their money into the stock funds right away.  If their stomach doesn’t allow them, they need to speak to a financial advisor.

Mid-career: A mid-career with 10+ years until retirement, a current portfolio of $350k, who likely needs $20k of investment income a year when they retire in the distant future.
Such an employee has 10 years (or more) before they even need income from this portfolio.  They don’t have to start transitioning their portfolio into a pre-retirement posture as of yet (see next case for transitioning).  As such, a mid-career employee with over 10 years until retirement should also consider a radical move of all their money into the stock funds right away.  If their stomach doesn’t allow them, they need to speak to a financial advisor.

Pre-Retirement:  A pre-retiree with 5 years until retirement, a current portfolio of $500k, who likely will need $10k of investment income a year.
Since they are 5 years away from retirement, they don’t need to already have the 10 years of income ($100k) set aside.  However, they should build toward that 10k starting now. This case should be discussed with a financial advisor, but an acceptable transition approach would be as follows:
Each year over the next 5 years they should gradually be moving $20k into the TSP bond funds.  This way, after 5 years they will have $100k in the TSP bond funds. The remainder of their investments should be invested in the stock funds.  So, immediately they should put $20k into TSP bond funds, and the remainder can be invested. This needs to be monitored and reevaluated on a year-by-year basis.

3. Which TSP funds should I be investing in now?
Future contributions should be purchasing the C & S funds now, until they return to their pre-drop levels.  I am not confident in the I fund, so I currently do not advocate for it. Now is not the time to buy into the G or F funds.

4. I have cash in the bank.  Should I use cash now to buy into the market?
Good idea, but here’s one word of caution – make sure you have reserves to get you through a three-to-six month window of reduced income.   Especially if your income or your spouse’s income have been negatively impacted by this economic downturn. This is a rainy day fund, which you’ll need to cover basic expenses.
In addition, you should not be investing money that you will need for short-term goals (within 3 years).
Anything beyond your rainy day fund and short term money can be invested in the market now.

5. Interest rates have come down really low.  Should I refinance now?
Lower interest rates are not always an opportunity to refinance.  Even if your interest rate drops 1 or 2 full points, that may not translate into interest savings when you consider how much you’ve already paid in interest on your current loan.  If you’ve already had your current mortgage for 6 years or more, refinancing may not save you interest at all!
But, refinancing may give you a lower monthly payment, which, in turn, may give you more money to invest now!  That may be the biggest benefit to refinancing now.
Alternatively, the lower monthly payment may help for those whose income will be reduced due to the economic impact of your virus.
The above points assume you are looking to refinance into a loan with a similar term to your current loan, meaning 30-year to 30-year, or 15-year to 15 year.  However, if you switch from 30 to 15 you will likely increase your monthly obligation, giving you less to invest. I would discourage that (unless it’s on a rental property).  On the other hand, switching from 15 to 30 may lower your monthly obligation substantially, giving you more money to invest.

6. How long do you think this downturn will last?
I don’t have a crystal ball.  It seems Wuhan – the epicenter of this whole Pandemic – has stabilized and returned to normalcy after 100 days.  If other countries, especially the USA have a similar duration, that projects us out to the end of April (The first US case was reported January 21, 2020).  This is a loss of about 3 months of full production. Painful, but not devastating to American economic infrastructure. If so, we may see rebounding as early as the beginning of May.  If the government lifts the public travel and social distancing requirements sooner, we may even see a market rebound start in April. The full market recovery may take 6-8 months.

7. Is this going to be another 2008?
Possibly but unlikely.  No crystal ball here but the dynamic now is different than it was in 2008.  2008 was a financial crisis that grew out of the economic pillars of our country, namely the banks and financial institutions.  The liquidity mandate for banks in 2008 was not as high as it is now. Furthermore, back then, banks had over-extended themselves in high-risk, toxic assets.  The 2008 meltdown started in the financial center of the country, and everyone who relied on the banking industry – meaning, everyone! – was directly and negatively impacted.  Nowadays, the banks are well funded. Liquidity is not an issue. Toxic assets have been purged.  The banks are not where the problem is, now. The current situation is not striking at the core of the American economy, but rather at a number of individual industries.  They are important industries, and the fallout has been painful, but not devastating to American economic infrastructure.

Again, there is a tremendous transfer of wealth going on right now.   I want everyone who reads this article to be on the receiving end of this so they can become magnanimous givers in the future.  I hope this article helps. If you are looking for personalized guidance, Request an appointment here.

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