Weather COVID-19 Market Volatility: Investments, Finances, and Tax Planning

Many events throughout history have caused the stock market to incur painful volatility—much like we’re experiencing due to the COVID-19 (coronavirus) pandemic.

Since the beginning of March 2020, stocks have fallen sharply accompanied by daunting headlines about coronavirus’s impacts on investments. While many individuals are wondering how these changes might affect markets and portfolios in the long term, others are asking if this unprecedented time might also present financial opportunities.

Following is an overview of how the economic response to coronavirus could impact your investments as well as financial and tax-planning strategies you can employ now to protect your assets and plan for the future.

Investments

A successful portfolio should be diversified and structured to anticipate turbulence. While the instinct to take action during times of uncertainty can be strong, abrupt moves can significantly damage long-term investment results. 

Historical Context

While every crisis is different, some historical context can be gleaned by reviewing market action during the Great Recession, from October 9, 2007, to March 9, 2009. 

During that time, the S&P 500 peak-to-trough drawdown fell an unnerving 50%. However, the duration of the bear market—a market wherein prices are falling—was likely cut short due to unprecedented intervention by governments and central banks.

History has also shown that market prices can quickly recover once the worst is over. The Great Recession’s bear market reversed course on March 9, 2009, when the Dow Jones Industrial Average (DJIA) rebounded more than 20% from its low after a mere three weeks of gains. The S&P 500 was up 30% by mid-May 2009, and up by over 60% by the end of the year.

That said, the challenging thing about market bottoms is it’s difficult to identify them; it certainly never feels like we’ve reached the bottom when we’re there. For example, The Wall Street Journal published an article in its Money and Investing section on March 9, 2009, that posed the ominous query, "How low can stocks go?”

And it wasn't an idle question—the DJIA was on its fourth straight week of losses, while the broader S&P 500 was below 700 for the first time in 13 years. A prominent investment firm was also warning that the S&P 500 could fall as low as 400.

Given this historical context, here’s what you can do now.

Focus on Goals and Appropriate Allocation

It might sound counterintuitive, but market volatility can result in an excellent portfolio rebalancing and buying opportunity. For long-term investors, this approach can enhance longer-term outcomes—even though the decision to do so can be challenging.  

Rebalancing is the process of realigning the weightings of a portfolio of assets. This process involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk.

While this process might not be right for everyone, a disciplined investment strategy can help your risk profile stay consistent while preparing for future volatility. It can also allow you to capitalize on investments that have done well and add to depressed areas of your portfolio, potentially at a discounted rate.

Stay Globally Diversified

One of the strongest ways to stay the course with your investment strategy is to develop a dependable asset allocation plan that takes your objectives and risk tolerance into consideration. You can do this by considering the following when building your plan:

  • Focus on global diversification.
  • Diversify your holdings to position your portfolio for a volatile market environment, and seek to have it deliver returns over time.
  • Design a portfolio with market downturns in mind by adding exposure to several different asset classes globally.
  • Become comfortable with the potential performance—both good and bad—of your portfolio under various market and economic conditions.

Again, always invest with your own circumstances, objectives, and risk tolerance in mind. 

Financial Planning

It’s important to have a go-to resource in times of uncertainty. When you’re dealing with stressors surrounding a volatile market, referring back to your comprehensive financial plan can help you to better monitor progress toward your overarching financial goals.

Make a Plan

A good financial plan should be based on your short-, mid- and long-term goals, and market movements should be anticipated and taken into account in the overall return estimate.

If you don’t already have a comprehensive financial plan in place, it’s important that it takes into account:

  • Life stage—your current circumstances, objectives, and risk tolerance
  • Current and future balance sheet
  • Estate and tax-planning considerations
  • Lifetime consumption and cash flow goals

Stick to Your Budget

During a market correction, some of the biggest risks you could face are needing to unexpectedly draw funds from your portfolio or sell at depressed values. Creating an appropriate cash buffer can help reduce your reliance on your investment portfolio and create flexibility.

By going through a comprehensive financial planning process, you should determine a budget that will weather volatile market environments. Updating your financial plan and sticking to your budget during times of market volatility is critical.

Tax Planning

Typically, the worst times for the markets are the best times for taxes. Volatile markets allow you to reposition your offerings so they can compete more effectively in the present market—or in other target segments—or take profits with little-to-no tax consequences.

Estate and Gift Taxes

If you have estate or gift taxes and are in a position to transfer wealth, market volatility can provide a once-in-a-lifetime tax opportunity. That’s because interest rates are near record lows, while asset values are in a severe decline. When those two conditions are combined, you can transfer a great deal of wealth using time-proven techniques, such as:

  • Annual exclusion gifts
  • Grantor-Retained Annuity Trusts (GRATs)
  • Intentionally Defective Grantor Trusts (IDGTs)

Executors of estates could also benefit from the six-month alternate valuation rule as well.

Disqualifying Dispositions

If you exercised your incentive stock option (ISOs) earlier in 2020 when the price-per-share was much greater, you may consider selling those ISOs now. This would trigger a disqualifying disposition, which could potentially allow you to reduce your alternative minimum tax exposure.

Option Exercise Strategy

Given the recent volatility of the stock market, the current fair market value (FMV) of your options may have decreased. This could potentially be an attractive time to exercise any nonqualified stock options (NQALs) or ISOs, due to the decrease in spread between your exercise price and the current FMV per share. This could allow you to pick up less income when you exercise.

Changing Landscape

Due to current market volatility, the potentiality of economic stimulus, and other future changes, it’s important to keep an eye out for potential opportunities in the coming months. As events unfold, we’ll publish ongoing updates on our dedicated tax planning page.

We’re Here to Help

Although the current environment presents unprecedented challenges, there are financial strategies you can employ now to come out on top. To learn more about how you can help position yourself for financial success during these uncertain times, contact a Moss Adams professional.

Note on COVID-19

During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: