The Planner's Perspective: Nervous Investors Have Options, Too

Paul Morrone |

By Paul Morrone, CFP®, CPA/PFS, MSA

With a recent spike in volatility at the end of 2018 and again in mid-2019, investors may be asking what alternatives are available to complement the securities in their portfolios. Concerns may range from political uncertainty, to valuations, to volatility or a trade war, and it’s not uncommon for there to be many moments in history when investors decide to hit the pause button. Any advisor with a long-term investment philosophy will tell you to tune out the noise and let your money work for you in the market. Over the long term (10 years or more), history has shown us that you will likely be rewarded for the risk you took and hopefully your capital is worth (significantly) more than it was when you originally invested it. I’m a firm believer in this philosophy, but sometimes individual investors are hesitant to deploy capital at times of uncertainty and are looking to capitalize on other opportunities that will positively impact their overall financial plan that doesn’t involve a traditional investment.

Money market/high yield savings/CDs: As interest rates have risen marginally, we’re now seeing some opportunities to obtain a no-risk 2% or so, many times with FDIC insured deposits available at banks. While it’s a far cry from the 5% money market days of yester-year, this is nearly a 100% increase in yield from what we were seeing broadly in savings accounts in the not-so-distant past. One caveat to watch out for is that FDIC insurance only applies to bank deposits of $250,000 or less per account registration per institution. Also, be careful as some banks have caps on the amount of principal they will honor favorable deposit rates on.

Treasuries: A little higher on the risk scale than a true bank deposit, treasuries (especially short-term treasuries) offer liquidity, generally little to no risk to your principal and an income stream in the form of interest payments.  In general, treasuries are still viewed as one of the least risky securities an individual can own, but are not without a marginal amount of credit, duration and interest rate risk.

Debt paydown: Those that have outstanding loans may want to evaluate their current debt service and use additional free cash flow or idle cash once earmarked for investment to reduce their liabilities. This is especially prudent if you are servicing any high-interest debt such as credit card debt, unsecured personal loans, student loans or subprime auto loans.  Reducing future cash outlays, interest expense and cleaning up your personal balance sheet can significantly increase your ability to ride out tough markets and periods of lower than expected income.

Gifting: While not a strategy to increase one’s net worth, gifting may be part of an individual’s long-term plan to benefit their family members, friends or charity (see below). Also, be removing outperforming assets from one’s portfolio, it may be a way to de-risk the overall financial household. With near-historic high equity prices, it may be a good time to gift low tax basis assets to younger generations. Pricing, of course, would be security specific, but if the gift can occur at a favorable time it may mean an individual could gift a smaller quantity of shares and transfer the same inherent value than if the prices were comparatively lower. As an added bonus, the recipient of the gift may be able to capitalize on lower, or even zero, percentage capital gains rates if the donor is in a materially different tax bracket than the recipient.

Charitable giving: Similar to gifting to family or friends, gifting to charities (either directly, in trust, etc.) comes with the added benefit of a charitable donation itemized deduction. For those in the highest tax bracket, this can be substantial and create an immediate savings of 37% on the amount donated. Furthermore, some states also offer a charitable giving deduction against state taxable income, further increasing the value of a gift. Creative planners will also review the qualified charitable deduction for those who are charitably inclined and hold large balances in their pretax (IRA, 401k, etc.) accounts.

Most important to note, however, is that each of these strategies need to be evaluated in the context of your personal long-term financial plan. While a nervous investor may find respite in these strategies during short-term periods of turmoil, deviating from an existing savings or investing strategy can have a material impact on your long-term expectations.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.