“It is tough to make predictions, especially about the future.”
–Yogi Berra
I wrote a post in April of 2020 predicting the pandemic’s path and recommended some financial actions here for readers. Then I took a long pause from writing this blog. I was busy taking my own financial advice. And I was pursuing other personal projects too.
It is now time to take stock. What worked, and what did not? How good did the predictions turn out to be?
We are going to cover that. And against my better judgment, I will also tell you what I think is coming in the future.
I will also cover some tips you can use now.
PRIOR PANDEMIC PREDICTIONS AND MILESTONE DATES
Here are some of the predictions from the post about Covid-19:
- Better testing would be available shortly (it was)
- Antivirals would be developed that would help by about the end of the year (yes, some, but not as much as I hoped)
- Vaccines would be approved for use as early as January 2021 (that occurred December 2020, far sooner than most experts predicted)
So, not bad on the prediction front—at least for medical progress against the disease.
THE ACTIONS
The April 2020 post discussed how to protect yourself in uncertain times too. The defensive actions you take during a crisis often matter more than the exact timing of external events. What follows is about what I did. Mostly it worked out–but not always.
POINT 1: STAY SAFE AND HEALTHY
Well, we stayed safe, lived a hermit-like life for about a year, and were blessed with good health. But, tragically, many hundreds of thousands of people could not stay safe, and my heart goes out to them and their families. Unfortunately, at this writing, the pandemic is not over either, even with the development of fully approved vaccines. So, none of us should let our guard down.
No matter your situation, staying healthy is vital for you, your family, finances, and your future. There is nothing else that is as important. Nothing. Don’t take your health for granted, ever.
POINT 2: REFINANCE AT LOWER RATES WHEN YOU GET THE OPPORTUNITY
The Federal Reserve’s support of the economy came as I predicted, and interest rates did drop, creating a good environment for refinancing. So, I refinanced my rentals. And it is not too late for most people: interest rates remain at attractive levels. So, if you are in the market for a refinance, do it before interest rates rise. That could happen before the end of the year. See here.
POINT 3: MAKE SURE TO KEEP WHAT YOU HAVE
I also stuck to a defensive theme by renegotiating one lease to keep a high-quality tenant in and reduced their rent by about 10 percent. That hurt, but I do not regret it. A vacancy would have been far worse. But it is not all roses. It appears that many rents are now going up sharply, and I am working off a lower rent base when I decide to raise it again.
Of course, the entire rental market is not out of the woods yet, no matter what anyone says. Federal protections against eviction and foreclosure have ended, while only a tiny fraction of the Federal government’s money to mitigate those problems has been sent to those who need it. So, the short-term outlook remains uncertain.
POINT 4: GO FOR QUALITY INVESTMENTS; DON’T PANIC AND SELL
This turned out to be good advice. And the richer you were, the happier you turned out to be if you followed it.
That is why most billionaires are ecstatic right now. Most held on to their stocks or even purchased more company shares when the price declined. Between March 18, 2020, and April 15, 2021, billionaire wealth in the US increased by 55%. Since the financial markets have gained value since the analysis in April, their gain is larger now.
Those who sold in panic lost out.
But not everyone prospered. Some went into the pandemic without resources, to begin with. And a lot of people at the lower end of the economic spectrum lost everything. So, the gap between rich and poor is worse than ever, which will be a massive problem in the future. Not only do I worry that people may not have enough resources to survive, I believe that the widening gap between rich and poor is potentially destabilizing.
As for me, I counted my blessings and took my advice and invested, and beat the Standard and Poor’s 500 Index by about 12% in 2020. But 2021 has me behind returns of that same index by about 2-3%. Put another way, a blindfolded monkey might have invested better than I have in 2021. So we will see what the rest of the year brings.
POINT 5: KEEP ADEQUATE RESERVES
I did this and got some unexpected benefits.
You see, in a bid to get more reserve flexibility, I converted some of my Individual Retirement Account (IRA) retirement savings into my Roth IRA. Unfortunately, the converted amount gets taxed like ordinary income. So, I paid a hefty tax bill as a result. That part of the transaction was not pleasant.
But that transaction helped me get prepared for whatever the pandemic could throw at me. For instance, if an emergency happened, that financial move allowed me to pay down the rental loans with money that would not cost me more in taxes (with some caveats about the use of the converted portion of funds within 5 years). So while I did not end up withdrawing anything, it was nice to have it as an option. And it gave me another hidden benefit too.
To understand why that is, let’s circle back and talk a bit about retirement accounts. Remember, Uncle Sam allows you to set aside some of your earnings in a regular 401k or IRA account. A standard account will enable you to deduct the contribution from your wages, reducing your income. In addition, you don’t pay taxes on the money on the account until you withdraw it during retirement.
But with a Roth IRA, you put money into the account, and while you do not gain a tax deduction, you don’t pay any taxes on the appreciated money when you draw it out at retirement, or after age 59 1/2.
So, my action served another purpose besides increasing my money in the Roth account. You see, the more that you can earn from appreciated assets inside a Roth IRA, the better off you will be in the long run. Put another way, in the long run, there will likely be more money for my family and me even after paying taxes. Compounding will work its magic over time, and any future withdrawal will not be taxed provided I follow the rules.
This is the second time I have converted regular IRA savings to a Roth IRA.
If this whole idea sounds familiar, the idea of using a Roth IRA to amplify long-term financial gain has been in the news lately—but in a way that has outraged many people. Many years ago, billionaire Peter Theil put some stock available only to select venture capitalists into a Roth IRA when it had minimal value. (And no, you can’t do this unless you are a venture capitalist who has access to new ventures at an early stage). The strategy worked well—to say the least. Theil’s Roth IRA is worth five billion dollars today. Legislation is pending that may make him cash some of those gains out.
To be fair, that kind of gain in a retirement account is not common. Not all of the rich avoid paying taxes in this way at all. For instance, while many use Roth IRA conversions, they DO pay taxes for the privilege. Ted Weschler paid a tax bill of $29 million in 2012 to convert his regular IRA to a Roth. His account was worth $264 million in 2018. Unlike Peter Theil, he invested solely in publicly traded securities available to everyone.
So, I have that in common with Mr. Weschler. But that is where the similarity ends. Warren Buffett hired him to manage part of Berkshire Hathaway’s portfolio. His skill in picking stocks is a bit better than mine. And his bank account is larger too–to say the least.
POINT 6: GET SOME PROFESSIONAL FINANCIAL ADVICE
Everyone needs an objective third-party opinion about their investments, financial planning, and economic health from time to time. So, once the dust settles on my transactions, I will get some professional unbiased advice and make some adjustments.
You should too.
You cannot do all your planning and management yourself. After all, if you had a doctor who insisted on taking out their own appendix, you would have to find another doctor.
SO, HOW DOES THE FUTURE LOOK?
Good question.
A lot of it still depends on what happens with the pandemic. And there are not many clear answers about that yet.
It appears that we will have two primary classes of people in the next three to four months: vaccinated people who do not have the disease and unvaccinated people who have had the disease. Eventually, both groups will have some measure of immunity, while the remaining minority will have none. There will be uneasy normalcy.
But that is unlikely to be the end of the crisis. At some point, there may be another variant that will challenge us again. We will be better prepared to deal with the medical and financial consequences of the next outbreak. But no one knows what that will be like or how severe it will be either. My guess is that we will be dealing with the virus as something endemic, not as an epidemic.
In the meantime, here are a few things to keep in mind that are more predictable:
- Sooner or later, the Federal Reserve will stop subsidizing our interest rates, and they will go up. The best guess is that this will occur around the end of the year or early next year. So refinance now if you can.
- Inflation is around for now, and no one knows whether that is permanent or just temporary. If you see a good deal on a major purchase and can complete it, that is not bad. The same purchase may cost more later.
- Hybrid work is here to stay. That will affect our jobs, economy, and lives. Stay informed.
- Keep watching the economic situation outside our borders. It is not as if the rest of the world has stopped turning. What happens in Europe, Asia and other places matters too–especially for the supply chains that keep our economy healthy
- Various forms of public assistance are ending for those affected by the pandemic. The impact on the economy will be unpredictable.
- Opening the economy back up is different this time. There are many imbalances in the labor markets and large variations in conditions between different areas of the country.
CONCLUSION
All of this tells me that I should not try to make any significant investments or decisions over the next few months until the smoke clears. Instead, I will be consolidating gains. I have had an excellent run. But remember, that is just me. Your situation may be different.
If you have unfinished business that will make your situation better, like refinancing, finish it.
And understand that your circumstances may have changed over the past year. For example, many people are sitting on huge gains from the financial markets, while others are still struggling from the pandemic. In either case, getting some advice from people who can help you is critical.
PS: My project over the last year has been to write a book. More about that in an upcoming post.
Disclaimer: consult with a financial professional before taking any steps outlined here. Not all advice is suitable for your circumstances or investment style.
Image: W. Carter, Asking the crystal orb. Wikimedia Commons
License: https://creativecommons.org/publicdomain/zero/1.0/deed.en