Live Sessions

Market Update: May 22 2020

  • Dollar Cost Averaging
  • Active vs Passive Investing
  • Small & Midcap Companies
  • Income Investing

Here is a recap of our live Q&A session held on 5/22/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.  Please join our next Q&A on Friday, May 29, 2020 at 10 am.

Details for our next event can be found here

What is the best way to invest in the market today? Should I invest in indexes or actively managed funds?

As we have indicated on previous calls, we believe a prudent strategy to invest in this market is through a dollar-cost averaging strategy. This should help mitigate timing issues when investing as it is difficult to pick the absolute best times to invest. As stated before, a plan of regular investing does not assure a profit or protect against loss in a declining market and you should consider your financial ability to continue your purchases over an extended period of time.

Over the past 10 years passive investments (index funds and ETFs) have consistently outperformed active managers. With the enhanced volatility in the markets today and the expectation that it could continue for some time, active managers may likely outperform indexes. Another case to be made for active management is that many companies may not be able to survive this environment or may have very poor performance. We believe that it is best to not own these companies. We would utilize active management to try to avoid owning these companies that would be part of an index. We would expect that this may be the ideal environment for active management to outperform passive management.

What do you think about investing in small and mid-cap companies in this market environment?

Small and Mid-Cap stocks are by nature more volatile and less liquid than large cap stocks. This theory has held true during this downturn as smaller cap stocks have lagged large caps this year. Smaller cap stocks are even more of a barometer of the economic outlook that larger caps as these companies are most impacted by the closing of businesses as they typically have more debt and less ability to withstand a business downturn. We would definitely recommend an active manager for smaller cap investing. We believe that these active funds should outperform small cap indexes.

How do we generate income from a portfolio with the risk of dividends being reduced or cut and with interest rates so low?

Traditionally, we look to dividends and interest to cover income for clients that need it. With the Ten Year Treasury yield below .7% (as of yesterday‘s market close) and several companies cutting dividends, alternative solutions should be explored. Consider that earlier this month Boeing, General Motors, and Las Vegas Sands each suspended their dividends entirely. MarketWatch published an editorial on May 5 citing the likelihood of companies like Deere, UPS, General Mills, Kraft, General Dynamics, and Kelloggs all cutting dividends as well.

As we look to generate income today, there are a couple different approaches to take. First, we may have to diversify further and include some asset classes that might not otherwise be included in some portfolios. For example, emerging market bonds, real estate inflation protected securities, high-yield, or junk bonds, all to be mixed in with traditional dividend paying equities and traditional actively managed bond portfolios in an effort to increase the overall yield of a portfolio. These asset classes come with different risks than you may be used to, so you will want to discuss this with your financial professional.

Another common approach in an environment like this is referred to as the bucket strategy. We fill three buckets with money, the “now” bucket, the “soon” bucket, and the “later” bucket. The now bucket is filled with just enough money to cover the next 10 to 12 months’ worth of needed income. The soon bucket is invested in a conservative portfolio with a shorter time horizon and the expectation that we will take funds from there to replenish the now bucket when it is empty. The later bucket is invested for longer-term with a little more growth focus. Periodically, gains are taken from the later bucket to replenish the soon bucket, and so on.  The idea is that we are not forced to sell securities during volatile markets or rely on asset classes that might be thought of as a higher risk in this environment, such as emerging market debt or junk bonds.  Rather, we have a reserve to draw from that may keep us from having to sell at the least opportune times.

Advisory services offered through Beacon Financial Advisory LLC or Lincoln Investment, Registered Investment Advisers. Securities offered through Lincoln Investment, Broker Dealer, Member FINRA/SIPC.,,, Tartan Wealth Management, FNA Wealth Management, and the above firms are independent, and non- affiliated.