A computer programmer named David Cook started a company in Dallas, Texas in 1985. After two years, Cook sold the company Blockbuster for $18.5 million, missing one of the most impractical run-ups in history. By 1992, this once small retail shop was sold again for $8.4 billion. By the late 90s, Cook’s bright idea for a store had amassed 9,100 locations nationwide, 60,000 employees, and over one billion customers per year.

Then, in 1997, a frustrated Blockbuster customer named Reed Hastings was charged a late fee, and he decided to create a company that modeled movie rental pricing after monthly gym memberships. Over the next years, Reed’s competing company, changed its business model numerous times, to stay relevant as technology evolved.

Reed saw the market changing and decided to pivot, offering web-based solutions to the retail giant and changing the way the market reacted. Today, Netflix has a market cap of $163 billion, and Blockbuster is long gone.

So why do I tell this story? For 12 years, we, as investors, have gotten very comfortable with easy living and index investing. So much so that we started using the minutia of basis points in costs to choose our investment vehicles (a basis point is 1/100 of a percentage point). In that, I have had clients request a change in investments based on seven basis point difference ($7 for every $10,000 invested). When we lose sight of what’s important, we reach for what we understand.

Until March 2020.

Like our hero in the story above, to survive and thrive, we are required to make changes to the way we think and act in changing environments. That is not to say this is blanket investment advice, but to think about your financial plan as a living document. In every market correction, there are winners and losers, and it isn’t until years later that those are parsed out. However, it is always the people who panic and make decisions based on emotion that end up on the wrong end of that analysis.

I don’t know what the future holds, and I cannot tell you when the market will return back to its highs. What I can tell you, with some level of certainty is that it will eventually return.

Notes from the First Quarter:

  1. Massive declines in capital markets brought along by earnings downgrades from loss of economic activity by the COVID-19 outbreak and ensuing quarantine rules across the world.
  2. Furloughed and laid-off employees are filing in droves for unemployment benefits from the federal government, backstopped by a massive $2 trillion stimulus bill to help provide liquidity.
  3. Small business owners have access to credit lines designed to keep businesses open and paying employees.
  4. There will be those that see this as an opportunity and those that see it as a failure.

Things to Consider this Quarter:

  1. Consider a Roth conversion for some of your IRA assets, especially if your income is down this year. Increasing after-tax retirement assets is an enormous opportunity to shore up income in retirement. Plus, it’s more valuable as a way to pass assets to younger generations.
  2. Consider gifting assets to children and charities this year in cash, rather than appreciable assets. When the market is down, gift cash and assume your investments will go back up at some point.  At which point, gifting appreciated securities alleviates the capital gain tax burden.
  3. Take this opportunity to harvest losses. Many of us have highly appreciated assets from the past ten years or so.  Most likely, you haven’t rebalanced the portfolio and have individual stock positions that are too highly concentrated for your risk tolerance.
  4. Update your financial plan and retirement income plan. Where to take money from in retirement can be more important than how much you have.

Example Client:

i. IRA of $1 MM and Roth of $1MM.

ii. Tax rate of IRA withdrawal is 40%

iii. Assume $100K withdrawal for living expenses

iv. Assume both accounts are down 30% YTD:

1. Withdrawal rate for IRA: 24%

2. Withdrawal Rate for Roth 14%

You will prohibitively pull more from the IRA than the Roth simply due to taxes owed on income.

Please call my office if I can be of any further help: 626.788.3947

Philip Clark, CFP® | Director – Wealth Management


These opinions are based on Philip Clark’s observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 04/15/20 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.

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