Investment and Estate Planning Survivalist Tactics in a Dixie CupAdvice to the Advisor
Before the Spanish flu hit, the company behind Dixie Cups was just another scrappy startup, Kevin Leland points out in fastcompany.com. Once the pandemic hit, because it was hoped disposable cups would help stop the spread of the disease, Dixie used survival tactics to eventually become a household name.
The moral of this story, Leland believes, is this: Timing is one of the crucial stars that must align for any start-up to succeed. But what if the timing isn’t right for a start-up? To succeed, you must survive until it is the right time, which is precisely why, Leland stresses, one of the most important skills for any startup is the ability to adapt.
Following the same logic (surviving until the ”right time” arrives), Sheaff Brock founder and partner Dave Gilreath and wealth manager Tiffany VanHook assert that all types of investors can improve their financial situation now.
The coronavirus pandemic, while causing a great deal of financial hardship to many investors, has also created new opportunities for investors to:
- reduce risk
- preserve assets
- position themselves for future market gains
Investment Survival Tactic #1
Administer the “earnings test” for your clients: If either or both of the following is true, (a) COVID-19 caused a cut in their 2020 income but they expect to earn more in 2021 (b) Their IRA asset value took a hit, but you expect it to recover in future; discuss a Roth conversion. (Take note, VanHook cautions: the conversion will trigger ordinary income tax for 2020; clients must prepare to use cash from outside the IRA to pay that tax.) But, as Mark Stein observes in Kiplinger, “a shrunken retirement savings portfolio has less to tax”!
Investment Survival Tactic #2
With rates at historically low levels, the commensurate interest rate risk is at a peak. Reducing bond exposure might be a good idea, Gilreath points out, perhaps using preferred stock as an alternative fixed-income asset. With preferreds historically less sensitive to interest rate moves than bonds, he adds, investors could face less of a threat to principal when rates turn upwards. Andrew Bary, writing in Barron’s, agrees, pointing out that “there are still plenty of income pockets in a record stock market that allow investors to put together a portfolio with roughly double the 1.8% yield on the S&P 500.”
Investment Survival Tactic #3
A shift from growth stocks to value stocks is worth considering, the two Sheaff Brock advisors suggest. Looking at the 30-day period ending June 10, in which the S&P Value Index outperformed the S&P Growth Index by 2.5%, Gilreath quips, “The value bird may be starting to sing.” “It appears the pendulum has swung to favor value stocks and recent data suggests the trend is accelerating,” Chris Carosa writes in Forbes.
Investment Survival Tactic #4
More “extreme” survivalists may choose to borrow money to buy reliable dividend-paying stocks, paying the loan interest, then pocketing the net gains, Gilreath and VanHook offer.Admitting “this isn’t a perennially viable strategy,” the two advisors note that the current wide spread between price/dividend ratios and interest rate on loans make the tactic worth consideration.
Estate Planning Survival Tactic
Ultra-wealthy individuals concerned about estate tax might find this an ideal time to set up a grantor retained annuity trust, VanHook explains. The current low interest rates combined with the market decline may create an ideal environment for this type of estate planning, possibly making this an opportune time to implement strategies to pass wealth to trust beneficiaries.
When Dixie cups originally failed to resonate with consumers, Kevin Leland points out, owners Luellen and Moore refocused their efforts on businesses rather than on consumers. “This helped the company survive during what was a slow period of adoption,” Leland explains.
“As the COVID-19 pandemic continues to extend its grip on the globe, executives must navigate their organizations through uncharted territory,” Michael Moeser writes in American Banker. In a survey, respondents rated their organizations’ performance in response to the pandemic positively,” Moeser reports, including attributes of employee resiliency, organizational decision-making, and adapting to new market conditions.
Advisors are in a unique position to encourage client resiliency through the use of investor survival tactics, Dave Gilreath and Tiffany Van Hook suggest.