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Last year was a very good year for investors.  The stock market finished well above average and bonds had significant appreciation due to the decline in interest rates.  All that continued until February 19th when the stock market reached an all-time high.  Storm clouds began to gather as the coronavirus began to spread around the globe.  Companies were taking on more debt due to the very low interest rates.  The tipping point came during the weekend of March 7^th and 8^th when Saudi Arabia and Russia got into a tiff about the level of oil production resulting in a huge drop in the price of a barrel of oil.  The credit market liquidity was rapidly drying up and talks of a deep recession began the stampede to the exits.  

 

With all that weighing on our minds, there was one question everyone was asking.  Where is the TP?  Much like how shockingly quick stock prices and interest rates fell, it took everyone by surprise how quickly the toilet paper aisle emptied and could not be completely refilled, if at all.  Who would have thought?

 

Beyond your effort to find TP, the current health and economic situation shed light on two key financial issues to consider for now or some other future uncertain times - an emergency fund and an Investment Policy Statement.

 

Emergency Fund

 

The importance of having an emergency fund has never been more evident than during the coronavirus event.  Unexpected financial emergencies can pop up without warning, much like the coronavirus.  Millions of people have been quickly removed from their place of work as they comply with the “shelter in place” restrictions.  Many small business owners have been forced to close their doors or significantly cut back on business resulting in a big drop in revenue.

 

By having an emergency fund, commonly considered to be 3-6 months of your expenses, you can keep paying your bills on time or keep the doors to your business open a little longer to buy time to make necessary adjustments, such as finding other temporary or full-time employment, adjusting your business model, or simply waiting out the current rough times until things get back to normal.  Even though the interest rate on readily available cash is typically low, it’s more important to have liquidity for your emergency fund than the return on it.

 

Investment Policy Statement (IPS)

 

An IPS provides a detailed game plan to help you make better investment decisions and take the emotion out of the investment management process.  It begins with the establishment of your financial goals which should be clearly detailed and realistic. 

 

You then identify your time horizon, which is how long it is before you need to reach your goal if you are in the accumulation stage of your financial life, or how long your money needs to last if you are in the preservation stage. 

 

Next you need to determine if there are any income tax consequences associated with the achievement of your goal.  Your tax bracket should be considered as it may help you to narrow down your investment choices and location of investments to receive the best income tax outcome, such as deciding about placement of bonds inside or outside of your IRA.

 

The toughest part of the IPS is to determine your risk tolerance, which is how much volatility you can stand.  It is important to get this right as it will help to set up your strategic asset allocation strategy establishing the target for each asset class, such as equities, fixed income, and cash equivalents, and for each subclass.  Equity subclasses would be large cap, mid-cap, small cap, international, and emerging market stocks.  Fixed-income subclasses would be Treasury securities, government agencies, mortgage backed securities, municipal bonds, corporate bonds, etc.   

 

You may be able to develop an IPS on your own, but it would be best to have a professional help in that process.  It would also be good to have an objective opinion when creating and following through on your IPS to keep you on track to achieve your financial and life goals, especially when things get tough like now when you may be tempted to make an emotional decision that could take you off track from a well laid out plan.

 

We are all working through these challenging times together and as history has shown, we will get through this rough time as well.  Stocks are down 20-50% and is a great time to buy.  Interest rates are also down and will likely be down for a while, so it is a good time to lock in some longer maturities with higher yields.  Let the coronavirus run its course by continuing to do your part to stop its spread and make plans for what you will do after we are able to move about more freely, the places we will go, the friends and family we will visit, and going to the store finding fully stocked shelves of TP!