THE ECONOMIC BLUEPRINT: Crisis and opportunity ... How to be ready for next time

“Necessity is the mother invention,” as Plato is credited with saying and others have repeated millions of times since. In this time of uncertainty, one thing is certain: we are all leading our lives differently now than before. Hopefully by now the initial shock has subsided, allowing people to figure out how to survive the current situation and then thrive on the other side.
(Quick aside: I would be remiss to not thank those on the frontlines of coronavirus. THANK YOU! I don’t want to be insensitive to those continuing to fight in the trenches. This column is not meant to suggest you should be doing anything besides keeping the rest of us safe.)

As Plato suggested thousands of years ago, times of crisis force us to question our past methods and consider new opportunities for the future. I sincerely hope you have reached this stage of coping with the crisis and can find possibilities for growth.

History may not Repeat Itself, but it does Rhyme

We may not see another global pandemic in our lifetimes (fingers crossed), but we will see more market corrections. Historically, economic contractions occur approximately every seven to ten years, although they’re not always as dramatic as what we’re experiencing now or what we experienced in 2008.

For my peers, we’re likely to experience this again in our working years, and then a couple more times in retirement. Everyone’s situation is unique but some foundations apply globally on how to endure and even flourish in these economic environments.

The Importance of Liquidity

Our strategies have always emphasized strong liquidity. I used to receive pushback from those wanting to stuff everything into the market, and then riding out whatever came their way.

When I reached out to my clients at the beginning of the quarantine, their response was unanimous: “ah, so this is why liquidity is important.”

Liquidity is important, both for opportunities and emergencies. At a baseline, most people should have at least three to six months’ household income on hand in case of emergency.

Even though the CARES Act relaxed the rules on taking 401(k) loans, this is probably not the best time to do so (since typical advice is NOT to buy high and sell low!). Previously, clients would have concerns that their money had minimal rate of return if it was liquid; but how do you measure the rate of return of being well-positioned to weather a storm?

Buy Low, Sell High

For those who are positioned to do so, this is an amazing time to be a buyer. We do not know if we will continue to test the bottom (my crystal ball has been overburdened these days), but we do know that many investments are at a substantial discount from a couple months ago. The key to all of this is being thoughtfully well-positioned.

The next economic contraction is always around the corner. How would it feel to be a buyer next time?

Now, for those who can afford to maintain significant liquidity, the question is what to do with it in the meantime. That is an individualized question to specifically address with your own advisor. Our partners specialize in this type of advanced planning and execution, and we are excited to share additional information with those interested in learning more.

Building a Strategy to Weather the Next Storm

The safety video on airplanes explains that if there is a loss of pressure, oxygen masks will drop down from the overhead console. One thing is for sure: they can’t manufacture and install the masks minutes before pressure drops. Obviously, planning for an event like that occurs months if not years in advance. Just the same, let’s learn from experiencing a financial contraction this time to plan for success the next time.
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Reuben Rashty is a managing director/financial advisor with the Wealth Management Division of Morgan Stanley in Bloomfield Hills. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates. To talk to Rashty about this or other topics featured in The Economic Blueprint, email him at reuben.rashty@morganstanley.com or call him at 248-723-1843.