Has the Pandemic Changed Your Financial Plan?

MARK RIEPE: COVID-19 started out as a health crisis, but it morphed into an economic crisis.

By the time you’re listening to this, that’s probably old news, but one statistic really brings home to me just how widespread the economic impact has been.

According to Schwab’s Modern Wealth Survey¹, 57 percent of Americans say that they or a close family member has been financially impacted by COVID-19.

Now it’s one thing to have an event that’s widespread and affects many people, but the biggest, most important events in history affect not only the present, but the future.

One obvious example of this is war, where not only lives are lost, but political arrangements often change in the aftermath.

In other cases, sweeping changes are brought about because of new technology that comes along and makes things possible that used to be impossible.

But there are other events that are even harder to categorize and see coming—unexpected shocks that change the way people think and behave far into the future.

I don’t know whether this pandemic is one of those events, but it might be. I think that because of two other data points from our Modern Wealth Survey.

At the beginning of 2020 respondents said that, on average, one needs $934,000 to be “comfortable” and $2.6 million to be “wealthy.”

When we recently re-did the survey, the average amount needed to be comfortable dropped from $934,000 to $655,000, and the amount needed to be wealthy dropped from $2.6 million to $2 million.

It always makes sense to be cautious about interpreting survey results, but that’s a pretty remarkable change.

It’s as if all this extra time with family members has caused people to re-assess what’s really important in their life.

And the conclusion seems to be that the most important things don’t require as much money.

I’m Mark Riepe, and this is Financial Decoder, an original podcast from Charles Schwab. It’s a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.

Personal experiences have great power to shape our attitudes and decisions about future risks. And this is especially true with financial experiences.

A recent study on this topic looked at the relationship between past stock market returns and participation in the stock market by an older and younger cohort of investors.² The older cohort was defined as investors over 60 years old, while the younger was defined as those under 40.

The authors of the study took a particular year and then, for each cohort, made an estimate of stock market returns during their investing lifetime—up to that year—and compared it to the other cohort. They also estimated how much each had invested in the stock market. They repeated this for several different years.

Here’s what they found: During years when the older cohort had experienced higher lifetime returns than the younger cohort, they tended to participate more in the stock market than their younger counterparts. When the younger cohort had experienced better lifetime returns than the older, then their rate of participation was relatively higher that year.

This is a fascinating result. You might think of stock investors as being focused on current economic conditions and prices and how the economy and prices will influence future risk and return—and to make decisions based on that forward-looking assessment.

But this study showed that there’s another factor at play, and that’s the prior experiences these investors had during their life up until that point. There are many other studies that demonstrate the long-term impact of personal experiences on financial decision-making.

One recent study showed that, just like Americans, the willingness of European investors to invest in stocks depends, in part, on their past experiences.³ Another demonstrated that the extent to which investors take into account inflation depends in part on whether or not they experienced inflation in the past.⁴

As I’m recording this, it’s impossible to predict with certainty how all of us will be influenced decades down the road by the events of 2020, but we do know that the financial lives of many people are different right now.

For this bonus episode, I wanted to learn more about how investors are adapting their plans and investing strategies given their experience with the pandemic, so I sat down with Jullie Strippoli.

Jullie is a vice president and assistant branch manager in Austin, Texas. She was a guest back on Season 4 when we discussed the importance of having a financial plan.

MARK: Jullie, great to have you here today. Think about the typical conversations that you were having with clients before the pandemic and the ones that you’re having right now. What’s different and what’s the same?

JULLIE: Well, Mark, when we work with our clients, we want to take into consideration that they could be in any of the four phases of financial life, whether that’s creating and growing their wealth, protecting and preserving their wealth, distributing their wealth during their lifetime, or distributing their wealth after death. What’s interesting about the pandemic and at the peak market decline, everybody, regardless of what phase they were in, had rapidly transitioned to the protect-and-preserve phase, as they were seeing the instability and volatility in the market. And what’s important to note is that protecting and preserving your assets is a perennial topic, but the pandemic really brought to light certain things that made it feel like a much more urgent conversation, things like weaknesses in the portfolio, portfolios that weren’t allocated correctly, or maybe were over-concentrated; cash flow is impacted; liquidity issues emerged as people needed to tap into their assets; and regular life events that just happen that seemed to be exacerbated by the fact that we were going through an extraordinary time in our world. So that definitely was why we centered our conversations a lot of the time around that protect and preserve, especially earlier on, but even now.

Another thing that we’re talking to clients about right now is estate planning. It’s been a very important topic as people have started to consider how it is that their families are prepared to take care of wealth in the future, should an event like this happen again. And there’s also some legislation from Congress that’s come through just prior to the pandemic that continues to be relevant as we look at the need to re-examine our estate plans and make sure that they’re in line and they’re well positioned. And then the other thing is the discussions around planning for the end of life. There certainly have been an increase in those discussions as people want to make sure that they’re prepared for the unknown.

MARK: When clients are reaching out to you lately is it because the circumstances of the client has changed, or is it because they now maybe appreciate more than they used to the … kind of the fragility of their situation in the world, the economy, and they just want to be better prepared?

JULLIE: Well, Mark, major life events are generally part of planning. But when we’re having those planning conversations prior to those life events, everything still kind of feels theoretical, and optimism prevails, right? So the decrease in the stock market, clients experiencing job loss, all of those … those are just two examples of opportunities that created a need to revisit and make sure that our clients were in the best position they could possibly be in.

Also, even those folks who were not immediately impacted or personally impacted all know somebody who was. So that definitely has the power to dramatically shift sentiment and have people thinking about the what-ifs all over again. So having the ability to explore those what-ifs in a planning conversation really has helped bring the situation to reality, and those who haven’t are finding increased value in that exercise right now.

MARK: Are you finding that you’re speaking to pretty much the same group of clients that you did before the pandemic started, or are you finding that maybe people that you haven’t spoken to in years, because, you know, frankly, they weren’t that engaged with their portfolio or their financial life, that they’ve gotten a lot more interested recently and they’re kind of coming out of the woodwork to kind of re-engage in ways maybe they haven’t done it in the past?

JULLIE: I would definitely say that we’re talking to both of those categories of clients. We want to make sure that we’re reaching out to everyone, particularly during these high-volatility times and uncertain times. Engaged clients, we know that they’re in a much better place because they’ve had the opportunity to have those conversations in advance. And we’ve considered some of these possibilities as part of the setting up of the portfolio and planning how we put all the pieces together. But we cannot underestimate the impact of raw emotion that’s associated with these large events. So we’ve been really lucky to be able to circle back with these clients and have conversations about how they’re feeling and how realistic we were.

But the other part of this is that unengaged investors have had no choice but to start to pay attention, and there are a lot of reasons for that. Rebalancing needs have been presented by the fact that the stock market had experienced a tremendous amount of volatility. Change in interest rates has reshaped the interest rate climate, which is another really important reason to look at your portfolio, depending on what kind of income needs you have and what your debt looks like. The legislation—the Secure Act, and the CARES Act that were passed by Congress—all have very direct implications on what it is that your financial picture overall looks like and should look like for the future.

But the most important thing that’s been really instrumental in helping us engage with unengaged clients is that people are bored, Mark. It’s a golden opportunity for us to reach out and have these deep conversations to truly understand their financial picture and help them think about the things that they should be thinking about that they might not have already considered.

MARK: I think that last point is really important. I think it’s a mistake, a mistake that many families make, is that they have one family member who kind of handles all the investing and the financial planning, and they don’t really bring in everyone else to be involved. So are you seeing examples of that, of family members kind of looking at this more, you know, as a group as opposed to just relying on one individual to make all the decisions?

JULLIE: Without a doubt. That’s been one of the bright spots of being able to reach out to clients during this time. We’ve always recognized that there are multiple stakeholders when it comes to a family’s financial success. And oftentimes if it were up to … if it were up to us, we would speak with every member of the family, but oftentimes we don’t get that opportunity.

So now with everybody being at home, with us being able to leverage technology and being able to see clients in their comfortable spaces with their families, we’ve had the opportunity to really get some important input from those other people who are affected by the plan. And I think that that has had a dramatic impact on being able to be a lot more personalized in how we create a plan to get those outcomes.

MARK: You know, that’s a great point. Obviously, we can’t control everything, but it’s really important to learn lessons from when these things happen so you’re better prepared the next time. So what are the enduring lessons that people should be thinking about as they try to learn from this experience and get better prepared?

JULLIE: The number one most important thing is to have a roadmap for your financial goals that considers the what-ifs. So thinking about things like “What if I lose my job in the future?” “What if I have to spend an extended time away from work?” “What if the stock market declines 35%?” Or “What if I don’t live as long as I thought I might, or I live longer than I thought I would, or even become incapacitated and unable to make decisions for myself?” It’s really not about predicting the next actual disaster, because that could be something widespread, or it could be something that’s very personal to you and your family. So what we want to focus on is how we’ll deal with the negative effects by putting ourselves in the best position possible now and going forward.

MARK: It’s interesting. You just were talking about “What if this bad thing happens?” “What if that bad thing happens?” Those are all very real-world. But I’ve noticed one thing when doing webcasts with clients is that certainly there are a lot of clients who are worried, and they’re concerned about the level of economic uncertainty and market uncertainty. But at the same time, there are an awful lot of clients who are looking at this as an investing opportunity. Do you notice the same thing with the clients in your branch?

JULLIE: Absolutely. Some of the other things that we’ve been talking to clients about in terms of taking advantage of the situation are the fact that interest rates are back down again at historic lows. So this is a great opportunity to re-examine the debt side of your balance sheet and understand whether or not it makes sense to reposition your debt. Having an efficient debt strategy is a really important part of having a successful financial plan.

The other thing, too, with the stock market decline is that it became less expensive to rebalance from a tax perspective. A lot of people were holding onto highly appreciated positions, really feeling like they couldn’t do anything with them because they didn’t want to pay the big tax bill, but that problem became minimized when the market declined. And it definitely was a possibility—or gave the potential for clients to reposition themselves a little bit more favorably and diversify. Other tax strategies that clients considered were things like a Roth conversion. Again, another long-term tax strategy that was made potentially easier based on the fact that the portfolio values had declined for a period of time.

What’s really relevant now, Mark, is that we are … the market has recovered so dramatically, we have a second chance to reposition and to look at how it was that we absorbed the reality of the volatility earlier in the year. And clients are feeling a little bit better about doing that analysis now that things don’t seem quite as dreary as they were a few months ago. So this is that second-chance opportunity that is really relevant right now and is coming to the forefront of our conversations with clients.

MARK: Jullie, we’ve got data from before the pandemic where people who have been through some form of a planning process, they say they feel more confident about their situation because they’ve done that planning. But you know, it’s one thing to say that you’re confident, and it’s another thing to actually feel more confident when you’re in the midst of the battle, so to speak. So what’s your sense as to the confidence level of investors and whether that’s really changed or is influenced by the amount of planning they did beforehand?

JULLIE: Well, there’s no secret that a decrease in the stock market reveals gaps in your overall strategy very quickly. Having a plan … having a plan set forth in advance makes somebody significantly more likely to have considered these gaps before they become so prominent. And maybe they won’t present themselves at all. So if you’ve already done a plan, then you’ve already examined how you would fare in a market decline.

What’s additionally important is you have to know yourself. So that theoretical conversation around how much risk you’re willing to take, there definitely is a reality check when it comes to what really happens when the market does decline, when that thing that you were talking about or thinking about that could have a significant impact on the ability to reach your near-term goals does happen. So you know, that certainly is something that might cause somebody to feel a little bit uncertain, even though they did put a plan in place in advance. But the power of planning is that we have that data-driven roadmap that helps us take the emotion out of the conversation. Overall, that’s the value of the plan. And those who haven’t put one together in advance are much more open to doing so now because it pays dividends.

MARK: Jullie, the behavioral economics literature is filled with examples of where some sort of … some sort of an event happened, and that event forever change the investing behavior of the people who experienced it, especially for those who were younger at the time. So it becomes kind of like the formative experience of their young adulthood. Do you think this is going to be one of those events?

JULLIE: I’d argue yes. I keep coming back to the statement that this feels like the defining mental health crisis of this era. And working with clients, particularly as it pertains to their finances, continues to confirm this thought for me.

2008 feels like forever ago. Many of the market participants who are participating in the market now were not invested at that time. So this is a first for a lot of people. And if we think about millennial financial experts, they talk a lot about how coming into the workforce after the Great Recession had an impact on their ability to save and earn. And Gen Z, I think, is going to have a very familiar story to tell. So I think that’s really relevant.

Another thing that … another thing that I’ve been paying attention to is the extraordinary impact of the careers of working mothers so far in this pandemic. Because not only are we experiencing market volatility, but we’re experiencing a major social disruption in terms of how we care for our children, how they’re educated. And right now, there’s a lot of conversation happening around what the decisions around caregivers are going to lead to as it pertains to the savings and investment gap, particularly for women, which already existed pre-pandemic, but looks like it could widen as a result.

MARK: Jullie, you get a chance to work with lots of different types of people. Schwab has just so many different types of clients. Can you give me a sense as to are there any examples of where behavior has been changed in a good way that’s going to, you know, really help people going forward?

JULLIE: Yeah, I think what’s really interesting about this environment is if we compare it to the Great Recession, as opposed to debt piling up right now, savings rates are actually increasing dramatically. And that’s definitely a product of the fact that we don’t have as much things to spend our money on being in lockdown and at home. And while you wouldn’t know it with my own personal online shopping habits, the overall savings rate is increasing. And so I think that’s a really good thing. That’s a good behavior that could be an outcome of this that would ... you know, it’s one of the controllables that, if that sticks with people, will help them have better financial outcomes over time.

Another thing that’s been happening recently, which isn’t a result of the pandemic, it’s more of a coincidence event, is that financial planning is being democratized. And with the market drop in the rear view being the optimal time to reassess risk tolerance and to reassess your overall financial picture, that democratization of financial planning couldn’t be better timed, and I’m positive that it’s going to lead to better outcomes for more people.

MARK: Jullie, a perennial blind spot for many of the plans for individuals is they just have a hard time getting that emergency fund in place to deal with, you know, job loss or other situations. Now that the stock market, at least as we’re recording this, has really recovered quite a bit of that big drop in March, would you advise people to sell investments in order to generate the cash to build up that emergency fund?

JULLIE: Well, the best advice I can always give is to try and build an emergency fund in advance of an event like this, but not everybody had that luxury. Right now, if I were faced with the ... or if someone is faced with the decision about how to generate liquidity, the reality is that if they have assets to sell, there’s likely more than one way to generate that liquidity. And so the most important thing would be to take some time to carefully examine all of your options to determine the most efficient choice that fits best within your overall goals.

MARK: Jullie, the last time you were on the show, you talked about how clients can be too optimistic sometimes in the course of a planning conversation, and they don’t … they’ve got blind spots for the potential negative things that could happen. Is there a risk right now that maybe that pendulum is swinging too far and people are getting too pessimistic?

JULLIE: Well, I would agree that optimism is challenging for some, but understanding what you can control is the key to maintaining that momentum. So in the conversation around planning and in identifying goals and solutions to meet those goals, if I can identify a pivot that makes a meaningful impact on the ability to reach someone’s financial goals, there’s an incredible boost there.

The biggest barrier to this is the fear of the unknown, coupled with the complete reluctance to ignore the weak spots. So leaving yourself in the dark is the biggest killer of optimism in my experience. But having some answers is critical for moving forward confidently, and it’s that confidence that’s the biggest driver of optimism.

MARK: Jullie, 2020 has been an unprecedented year in so many different ways. Has anything really surprised you when working with clients during this time period?

JULLIE: What’s really inspired me recently, Mark, is the desire of our clients to explore how they can impact their communities during this time. There are a myriad of issues that our communities are facing right now. And we have an opportunity to leverage favorable charitable giving tax strategies to be part of the solution. So having those discussions to put plans into action has been incredibly rewarding.

MARK: That’s it, Jullie. Thanks for joining me today. You’ve got a real gift for really speaking clearly about these topics, and in a chaotic world, clear communication, I think that matters a lot to people. So thank you.

JULLIE: Thanks so much for having me.

MARK: Jullie Strippoli is vice president and assistant branch manager in Austin, Texas. You can also follow her on Twitter @JStrippoliCS. That’s J-S-T-R-I-P-P-O-L-I-C-S.

Jullie raised many good points, but the ones I find most interesting are how people have reacted during the pandemic and the resulting economic fallout. In our Modern Wealth Survey, 36% of Americans say they are more likely to have savings to cover emergency expenses than before the pandemic.

And 40% say that they’ll be more likely to save in general compared to before the pandemic.⁵

I hope both of these are true. And while I’m a big believer in the power of investing to improve one’s life, it’s rare for an individual to reach financial comfort without being a saver first.

Think of your savings as a fuel or raw material. By itself it isn’t terribly valuable. It’s what you can do with it that makes it valuable. And investing is what you can do with savings to achieve your goals in life.

That connection between goals and investing is important. Investing is a means to an end, not an end unto itself. The goals are what matter, but goals without a plan to achieve those goals are just pleasant dreams. They feel good in the moment, but the minute you wake up, they’re gone.

The good news is that our survey also indicated that 24% of respondents will be more likely to prepare a financial plan going forward. If you’re in the accumulation phase of your financial life, I hope you’ll follow through on those plans to save more.

And whatever your circumstances, if you’ve been affected financially by the pandemic or want to be better prepared for the next calamity to come, please reach out for help. If you’d like to talk to Schwab about your portfolio, you can call us at 877-279-4476.

I’ve got two more pieces of advice before I go. I started this episode talking about the influence of personal experiences on our future behavior. Of course, it’s important to learn from our experiences. But there’s a difference between learning from experiences and becoming a prisoner of them.

Just think about 2020 for a moment. The stock market dropped 35% over several weeks in the first quarter. It would certainly be understandable for someone who had most of their money in stocks to be skittish about the market after that drop.

On the other hand, someone might look at 2020 through a somewhat broader lens and conclude that the stock market can drop a lot, but that it snaps right back within a few months. If you draw that conclusion, maybe you’re not the least bit concerned about stock market volatility.

Both of those reactions are based on personal experience. After all, that is what happened in 2020.

In my opinion, both reactions would constitute an over-extrapolation of this year’s events.

Every market cycle is different, and while the experiences of one year are somewhat useful, they’re hardly a blueprint of what the future will hold. So don’t forget about 2020, but don’t treat it as a crystal ball either.

Second, if you’re older and either in or near retirement, you need to confront the fact that interest rates are likely to stay low for some time. That matters because a relatively safe source of income has been dramatically reduced. Maybe that will impact you and maybe it won’t, but it’s important to find out one way or the other instead of just leaving your portfolio on autopilot.

Every Schwab client can now get a complimentary financial plan to help you reach your retirement goals. To get access to a complimentary plan with any Schwab account or to learn more visit schwab.com/plan. That's schwab.com/plan.

If you’d like to hear more from me, you can follow me on Twitter @MarkRiepe. M-A-R-K-R-I-E-P-E.

And if you’ve enjoyed this episode, please do consider leaving us a rating or review on Apple Podcasts or your favorite listening app.

Thanks for listening. 

We’ll be back with more episodes soon.

For important disclosures, see the show notes and schwab.com/financialdecoder.

¹ https://pressroom.aboutschwab.com/press-releases/press-release/2020/COVID-19-Changes-American-Perspective-on-Wealth-and-Finances/default.aspx

² Ulrike Malmendier, Demian Pouzo, and Victoria Vanasco, “Investor Experiences and Financial Market Dynamics,” Journal of Financial Economics, 2020.

³ Miguel Ampudia and Michael Ehrmann, “Macroeconomic Experiences and Risk Taking of Euro Area Households,” European Economic Review, 2017.

⁴ Ulrike Malmendier and Stefan Nagel, “Learning from Inflation Experiences,” Quarterly Journal of Economics, 2016.

⁵ https://pressroom.aboutschwab.com/press-releases/press-release/2020/COVID-19-Changes-American-Perspective-on-Wealth-and-Finances/default.aspx