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The Expected Meets the Unexpected

March 24, 2020
by Jack Reynolds

Seven Suggestions for Investors in a Recession and a Bear Market


We have all expected a correction of over-valued equity markets (and other asset classes) for quite a while.  I have been writing about the likelihood of this happening in my newsletters since November 2017 – fair enough, I was early. What was unexpected is that a pandemic would trigger a correction so stunning, abrupt and severe, that instead of a correction, we have a bear market.

Furthermore, few saw the likelihood of a Covid-19 pandemic and its economic consequences. In this context, the highest priority is to assure your health and safety and that of your family.

This newsletter addresses the likely economic fallout and offers seven specific suggestions for investors. Since I am not a prognosticator or a futurist, I cannot opine on when the equity markets will rebound. So how can I be helpful? I address two questions that clients have asked me:

  • Will there be a recession?
  • What can we do about our financial and investment affairs, now that we are in a bear market?

Will there be a recession?

It is fair to say that the answer is yes there will be a recession. We have not had a recession since 2008, so a lot of people have forgotten that economies have recessions. It is normal. The Fed has striven to postpone the next recession, but this time around that may not be feasible.

More interesting is how long and how deep the recession will be, and importantly, whether markets have overreacted to the looming risks. Michael Cembalest of J. P. Morgan Private Bank makes the case that U.S. equity markets have priced-in a dramatic corporate-earnings recession. In his view, the likely outcomes may be less draconian than markets appear to anticipate.[1] If he is right, investors with cash may have an opportunity to deploy it profitably.

That said, the intervention by federal, state and local governments in every aspect of the economy (and our lives) in this case is truly unprecedented. The Wall Street Journal recently ran an article “The Trade-Off Between Economy and Health.”[2]

“There is no clear historical precedent for the scale and nature of this shock [to the economy]. Some economists see U.S. output falling by more in the coming quarter than in the worst quarter of the 2008-09 recession. Nonetheless, previous episodes of pandemics, disasters and crises offer clues about what to expect, how policy makers make matters better or worse and the likely long-term consequences.

“A few lessons stand out. First, governments and the public always face a trade-off between economic stability and public health and safety. The more they prioritize health and safety, the bigger the near-term cost to the economy, and vice versa. (emphasis added)

“Second, at the outset of the disaster, policy makers are coping with enormous uncertainty. Early responses are often timid or off-target and more sweeping action is delayed by political disagreement.  . . .

“Third, disasters often create permanent changes to habits, and the most affected [sectors] industries and regions can take years to recover.  . . . But for society as a whole, the scars heal remarkably quickly. Humans are immensely adaptable.” (emphasis added)

In the case of Covid-19, the trade-offs, for better or for worse, are, some argue, being aggressively tilted toward health at the cost of the economy. That is occurring in a manner that was not present in the six other cases explored in the referenced article. There are others, however, who think the response is not aggressive enough to avoid widespread death and further disruption. How this will impact investors over the next five to ten years is impossible to say at this stage. The foregoing context is vital to bear in mind as you consider my seven suggestions below.

What should investors do in the bear market?  

As you recover from the shock of the suddenness and depth of the current bear market, there are a number of things you should do. Let me start with a list recently offered by Cambridge Associates in a webinar:[3]

  1. Take a deep breath, stay calm, and accept the uncertainty;
  2. Remember that your investment policy is your anchor to windward and was developed with consideration of bear markets;
  3. Stress test your portfolio to review sources and use of cash;
  4. Rebalance; and
  5. When appropriate, seek opportunities.

For taxable investors, there are a sixth and a seventh step to be added: harvest tax losses and investigate advanced planning strategies.

1. Stay calm and accept uncertainty

Panic is not your financial friend. Remember that you already have an investment strategy (your Investment Policy Statement, or IPS), and this is not the time to abandon it. No one can tell you when or where the bottom is. No one will ring a bell when we get there. We all need to accept and work with the uncertainties that face us. We should strive to maintain a disciplined approach to investing. I am reminded of the Rudyard Kipling quotation, “If you can keep your head when all about you are losing theirs … yours is the Earth and everything that’s in it.”

2. Return to the bedrock of your Investment Policy Statement

Your Investment Policy Statement provides a roadmap in times of stress, volatility and uncertainty. Use it as your touchstone. What does it tell you about your asset allocation? Is your current asset allocation in the new bear market consistent with your long-term strategic target asset allocation? What does your IPS tell you about your cash position? Is your current cash position consistent with your Investment Policy Statement? This is a good time to review your IPS and to strive to conform your investment behavior to it.

3. Stress test your portfolio

How much liquidity (cash, money market funds and very short-term fixed income) do you have? How much cash are you going to need over, say, the next two years for:

  • Living / lifestyle expenses;
  • Taxes of all sorts (federal, state and local income, gift, real estate, etc.);
  • Charitable commitments (both previously undertaken and new ones considering that favorite charities are likely to be hit hard and will be asking for extraordinary contributions);
  • Family gifts and gifts to other persons who may need your help in Covid-19 pandemic;
  • Foreseen / foreseeable expenses, e.g., children’s and grandchildren’s education, non-investment asset acquisitions;
  • Capital calls from non-marketable alternative asset investments to which you have made contractual commitments; and
  • A reserve for unforeseen / unforeseeable expenses.

These matters need to be addressed before seizing potentially exciting investment opportunities.

4. Rebalance

Asset allocation is a hugely important determinant of investment outcomes. An abrupt bear market, such as the current one, is likely to have thrown your actual asset allocation out of kilter. While in “normal” market conditions, taxable investors might only rebalance once or twice a year, in a period of dramatic dislocations and/or volatility, it may be wise to rebalance every calendar quarter, or even every month. Rebalancing applies with equal force to tax-exempt entities, such as endowments, foundations and charities, and to tax-deferred accounts, such as Individual Retirement Accounts.

In a situation such as the current one, failure to rebalance your portfolio back to its target asset allocation (documented in your Investment Policy Statement), leads to your making active bets against the very goals that you have set for yourself. For example, if your global equity target allocation is 70% of your portfolio, and it has fallen to 50% as a result of a 30% bear market move, if you do not bring it back to 70% of your portfolio, you are making an aggressive bet against global equities. Do you really want to do that? If so, you should also be making fundamental changes to your Investment Policy Statement.

Please give serious consideration to maintaining a disciplined rebalancing protocol.

5. Seek investment opportunities

The opportunities that are right for one investor may not be for another. Talented, experienced, and importantly completely disinterested/unbiased investment professional(s) should be consulted. Such a person can be of great help to you in seeking investment opportunities in turbulent times that are suited to your circumstances. This is an important time to evaluate and potentially to seize those opportunities.

6. Harvest your tax losses[4]

If you are a taxable investor, sort through your taxable portfolios identifying any and all tax losses that you have. Consult with your investment professionals and your tax counsel. Evaluate the suitability of taking your tax losses and immediately reinvesting the proceeds in comparable, but not identical, assets. Your investment professionals and tax counsel can assist you in getting this right. 31 days, or more, after taking a particular tax loss, you can return to precisely the investment that you sold. Again, please seek professional guidance in this process. This is a valuable opportunity not to be overlooked.

7. Advanced planning opportunities

Talk with your investment professionals, tax counsel, estate and trusts attorney, and importantly your financial planner. Together they can help you review your idiosyncratic investment, tax and financial/estate planning context. Sometimes market disruptions provide unexpected planning opportunities that should not be overlooked.

Have Questions? 

If and when you consider getting help with any of the foregoing and to learn more about our Services, please give me a ring at 617.945.5157, or shoot me an Email.

I look forward to hearing from you,
Jack Reynolds



[1] “Webcast Replay: Stay Up-to-Date on COVID-19 and the Markets,” J.P. Morgan Private Bank webinar replay, Michael Cembalest, Chairman of Market and Investment Strategy, and Mary Erdoes, CEO of J.P. Morgan Asset and Wealth Management, March 20, 2020, with specific reference to minutes 38 through 55, and slides 28-40.  Should you have the patience for a resolutely positive view of U.S. equity markets, please see a 16-minute conference call replay: “Vulcan Value Partners: Comments on Recent Market Volatility,” March 11, 2020, led by C.T. FitzPatrick.

[2] “The Trade-Off Between Economy and Health,” by Greg Ip, Danny Dougherty and Antony De Barros, Wall Street Journal, at p. B1, March 21-22, 2020.

[3] “The Bear Awakens: Market Implications of Covid-19,” Cambridge Associates, Webinar, Mary Pang, Head of Global Private Client Practice, Celia Dallas, Chief Investment Strategist, Mark Evans, Managing Director Endowment & Foundation Practice, and Kevin Rosenbaum, Deputy Director, Capital Markets Research, March 19, 2020. (Jack Reynolds was a Senior Managing Director of Cambridge Associates, where he was employed from 1995 to 2010. He has no ongoing association with the firm.).

[4] Reynolds Group, Private Investment Counselors, LLC employs no tax professionals and does not provide tax advice or tax services.