Last year provided a rare opportunity for investors to experience many of the benefits of working with a quality advisor and having access to disciplined portfolio management—all in a single calendar year. The conditions—both human and financial—under which this opportunity arose are circumstances we hope to never repeat. As 2020 fades into the past, a clear lesson has emerged regarding the important roles that solid planning, thoughtful client engagement and disciplined investment management played helping clients remain on track toward their long-term financial objectives during a period of significant and prolonged disruption, both at home and in the financial markets.
The benefits of sound planning, disciplined portfolio management, and solid investment performance
In January 2020, the markets began the new year in an apparent continuation of a 10-year bull market, buoyed by a period of sustained economic growth. However, when the reality of the COVID-19 pandemic hit home in late February, the U.S. stock market plummeted 34% in a matter of days as the markets, investors and businesses around the globe grappled with both the severity and the uncertainty of the situation. With unprecedented speed, the Federal Reserve acted to lower the federal funds target rate and put measures in place to support liquidity and ensure the markets were able to function. While the financial markets began to stabilize, albeit at much lower levels, significant unknowns remained.
A rare convergence of investment opportunities
When global uncertainty and unprecedented volatility gripped the markets, it presented a unique opportunity to demonstrate the value of a disciplined investment management process in real time. According to Eric Jones, Chief Investment Officer with TIAA, FSB - Investment Management Group (IMG), this was where the benefit of sound planning, disciplined portfolio management and solid investment performance came together to make a real difference for many investors.
“Last year was an example of many of the kinds of investment opportunities, which normally happen over several years, or even an entire business cycle, happening all in one year,” Jones said. “It also enabled us to demonstrate, in a measurable way, how disciplined portfolio management can positively impact our clients’ financial outcomes.”
In a typical year, investment managers may or may not see opportunities to harvest losses, a need to re-allocate or rebalance portfolios, or a significant market increase or decline. In 2020, the markets delivered these opportunities all at once in a very material way, presenting a rare opportunity for advisors and portfolio managers to prove their mettle across all facets of the investment process.
For most investors, making the right investment decisions to take advantage of these opportunities is difficult under normal conditions. Making them in the midst of the uncertainty that goes hand-in-hand with a pandemic, is unnerving. One reason for this is because investors often focus purely on investment returns. However, Jones says realizing those returns is dependent on three critical elements: A sound financial plan, a disciplined approach to portfolio management and access to an experienced advisor. Working with an advisor can provide the perspective and guidance needed to help you remain confident in your strategy and make adjustments, as warranted.
A heightened focus on client communication and engagement
Jones has always believed that communication and perspective are fundamental to helping investors pursue their desired outcomes. Ongoing efforts to engage clients were further ramped up in 2020, as turbulence and uncertainty began to flood the marketplace. Over the course of the year, TIAA client outreach initiatives ranged from virtual one-on-one client meetings, seminars and live webinars, to print and digital communications.
Jones believes it was really important for IMG to work together with TIAA advisors and portfolio managers to engage and educate clients on what was taking place during last year’s rapidly changing environment. Much of IMG’s thought leadership and client engagement efforts centered on providing important context relative to how the markets were reacting and why these circumstances presented opportunities to improve their portfolio positioning via rebalancing or harvesting losses that could be used to offset future gains.
“We also made a point of revisiting clients’ risk tolerance and their short and long-term financial needs,” Jones said. “Specifically, was their plan still appropriate? Did they experience a change in circumstances that would warrant revisiting it? And, once understood, were they able to stick with it? It was really all about having confidence in your plan and your advisor.”
Staying invested and avoiding the temptation to time the market is critical
Clearly, competitive investment performance is important. However, far more important than the return you earn is the act of being invested in the first place. According to Jones, whether your investments return 6% or 16%, if you’re not invested, it really doesn’t matter.
However, even the most experienced investors can find themselves making emotionally driven decisions during unusually turbulent periods, which can result in trying to time the market’s ups and downs. This theme was widely echoed by TIAA Chief Financial Planning Strategist, Dan Keady, CFP®, and TIAA advisors throughout the year.
According to Keady, the problem with market timing is that you have to make at least two decisions: When to get out and when to get back in. Both are very difficult to get right. For example, if you sell stocks when they’re down, you may lose out on gains when prices go up again. That’s because, historically, the stock market has recovered from slumps over the long term, although past performance is no guarantee of future results.
Opportunities emerge for harvesting losses
Ongoing market volatility also provided important opportunities for tax loss harvesting and portfolio rebalancing, as indicated in the graph below.
Early in the year, the sharp downturn provided opportunities to harvest investment losses and store them up in the event gains materialized later in the year, which they did. Tax-loss harvesting is the process of selling individual securities in your portfolio that are trading below your purchase price to lock-in the tax loss in order to offset a tax liability created by realized capital gains.. By applying the loss against the gains, you effectively lower your investment tax burden.1
2020 provided multiple opportunities to add value through active management
Rebalancing creates alignment with risk tolerance
The large downturn also created significant opportunities to rebalance portfolios to their target asset allocation and risk level. This is important because market swings can throw portfolio allocations out of alignment with investors’ goals and risk tolerance. In the case of the downturn in 2020, with the allocation to equities shrinking as a result of the decline, refilling the equity bucket helped position portfolios to take greater advantage of the upswing in the second half of the year. Keep in mind, rebalancing does not protect against loss or guarantee that an investor’s goals will be met.
Importance of working with an advisor
Advisor engagement proved critical for helping clients ride out the volatile market and access opportunities. Keady spent much of last year reminding clients that their financial plan not only provided a valuable roadmap for the future, but a structure they could draw upon to buffer, secure and optimize their assets during times of change or increased volatility.
“Last year was about helping people to understand which levers to pull and when,” Keady said. For example, instead of drawing down on their portfolio assets during a period of increased volatility, TIAA advisors urged retirees to consider drawing income from cash reserves, such as emergency savings, to provide longer-term assets a chance to recover from extreme volatility.
“Building and maintaining emergency savings is a core part of our planning process,” Keady said. “The environment we experienced throughout 2020 is why we encourage clients to set aside six to twelve-months of living expenses in liquid cash reserves that they can draw upon to avoid taking losses in their retirement accounts.”
“It’s hard to overstate the importance of emergency savings,” he added. “Even if you didn’t tap into those savings, knowing you had access to cash during a turbulent time provided many people with greater confidence during a period of growing uncertainty.”
Keady and his team also worked closely with clients throughout the year to identify alternate sources of guaranteed income to avoid cementing investment losses by taking income from their portfolios. He notes that a lot of people who weren’t really focused on guaranteed income over the course of the recent ten-year bull market were thinking about it last year. Through regular discussions with their advisors, clients were able to better understand their options and make informed decisions aligned with their long-term objectives.
IMG’s view of the road ahead
While 2020 was about the ability to protect and the agility to adapt, this year is about refining those lessons. Jones cautions that uncertainty is not going away anytime soon. This is reflected in IMG’s cautiously optimistic outlook for 2021, which is based on several themes, including the continued influence of COVID-19, expectations for lower bond market returns in the coming years and the continuation of market volatility, driven in part by ongoing political, economic and social uncertainty.
Jones emphasizes that understanding your investments and strategy and remaining engaged with your advisor continues to be important at this stage of the economic recovery.
“While change is inevitable, anchoring yourself in a plan can help ensure you’re in a better position to weather that change,” Jones said.
For investors and investment managers alike, last year illustrated—in dramatic fashion—why a disciplined approach to investment management matters. According to Jones, the combination of sound planning, engagement with an experienced advisor, and disciplined portfolio management are all critical components for realizing one’s desired investment returns.