Enjoying the Ride: COVID, cash and ‘DCA’

By Scott Brown EBS CONTRIBUTOR

I began my career as a financial advisor more than 25 years ago. My objective was simple: help clients reach their financial goals.

Throughout my career, I’ve learned that financial goals aren’t based on arbitrary numbers like having $1 million before you retire. Instead, personal financial goals are driven by what’s most important in life to those investors, including the health and financial well-being of spouses, children, grandchildren and employees. 

In most cases, these goals also include philanthropy, spirituality and the pursuit of other interests like fitness, travel and hobbies; in other words, the pursuit of happiness. So, I partner with people to assist them in making prudent financial decisions so they can enjoy life and make life more enjoyable for those they love. This is the focus of my column, “Enjoying the Ride.”    

As everyone is acutely aware, COVID-19 has created a global shock to our way of life, the capital markets and the global economy. People around the world are suffering from the disease itself, its economic repercussions and its long-term societal impacts. Nonetheless, I have five reasons to be optimistic about the economy and capital markets.

First, our economy was extremely strong when the market selloff and economic slowdown began. Second, the Federal Reserve reacted with a swift and robust response. Third, Congress passed the CARES Act on March 27. Fourth, I believe we’re beginning to win the battle against this invisible enemy. And finally, after witnessing the emergency response failures at the federal, state and local levels, we’ll be better positioned to respond to the next crisis. As such, I expect a strong V-shaped recovery for both the U.S. economy and capital markets within 12-24 months.

Now, let’s shift gears and quickly review two strategies of a sound financial plan.

The first strategy is having an appropriate cash reserve, which can provide you with liquidity in the event of an emergency or when faced with an opportunity. It’s similar to backstops behind batters in baseball.  The amount you hold in reserves depends on your relationship status, employment status and whether you own a business or have dependents.

A rule of thumb is having a cash reserve between three and 12 months of net expenses. In volatile and uncertain times, having a cash reserve allows you to cover months of lost employment income, “buy the dip” in the market, lend money to friends in need or make contributions to philanthropic organizations.

The second strategy is dollar-cost averaging, or DCA. A DCA is a systematic savings plan that over time can help offset market volatility and allow for a lower average-per-share cost of a stock or mutual fund. A perfect example of a DCA is investing in a 401(k) plan. DCA plans remind me of climbing a mountain:  each step you take or hold you grab ultimately gets you closer to the summit.

If you’re already using these strategies, congrats! If not, plan to implement them soon. I hope you find this information helpful and I trust you and your loved ones stay well and prosper during these challenging times. As always, before you embark on your next life adventure, set your sites on your goals and keep enjoying the ride!

Scott L. Brown is the cofounder and managing principal of Shore to Summit Wealth Management. His wealth management career spans more than 25 years and he currently works and lives in Bozeman with his wife and two sons.