by Zonder Family Law Group
Zonder Family Law Group recently sat down with John Duffy, CDFA®, of Zen Divorce Solutions to discuss the current economic uncertainty and how to best protect your assets – especially if you are going through (or about to go through) a divorce.
There is so much uncertainty in both the stock and bond markets, as well as in our economy as a whole. Prices of everyday goods are soaring and people are worried about the future. Can you give us a brief tutorial on terms like inflation, market volatility, correction, bear market, and recession?
Inflation is an increase in the costs of goods and energy. Commonly it is caused by consumer demand outpacing supply, called Demand-Pull. However, our current inflation is Cost-Push, which happened when a supply shortage, caused by global supply chain disruption due to the pandemic, paired with elevated consumer demand, caused prices to rise. It is important to note that many small businesses have needed to raise prices to survive. However, some of the largest corporations, notably oil and gas companies like Exxon and Chevron, have had their best profits in years. Some of this is attributable by supply and demand distortions caused by the war in Ukraine (and subsequent sanctions against Russia).
Market volatility occurs when the markets have strong oppositional and alternating days (weeks, months) of buying and selling. A day of significant market decline can be followed by an equally strong bounce back and vice versa. This often occurs when there is market uncertainty caused by mixed or changing economic data like jobless claims or inflation rates.
A correction is arbitrarily defined as a 10% decline in stock prices from their highs (peak-to-trough). This event can cause greater selling pressure, which can lead to a bear market.
A bear market, similarly, is a 20% decline in stock values from their highs. We were in a bear market for a hot second before recovery began in mid-June.
A recession is not related to the change in stock values. It used to be defined as two consecutive quarters of economic decline in the Gross Domestic Product (GDP). However, the National Bureau of Economic Research (NBER), the agency responsible for officially declaring a recession, now defines it more subjectively as a significant and broad decline in various economic indicators. We seemed poised to enter a recession but now appear to be backing away from that.
What are you anticipating in terms of market volatility over the next 6-12 months?
We are likely to experience continued market volatility due to the uncertainty around inflation and the Federal Reserve’s ability to affect it, mixed quarterly earnings, and continuing global supply chain disruptions caused by the pandemic and countries’ varied responses to it, among other factors.
What are you anticipating with the bond market over the next 6-12 months?
The bond market will likely continue to struggle as the Fed raises interest rates. If you own bonds directly, remember they have a par value you will be paid at maturity or call date and there is no reason to sell those. Bond funds though, where you do not own the bonds but instead “rent them,” have and are likely to continue to underperform. Treasury Inflation Protected Securities, or TIPS, may provide some hedge against losses in value but the devil is always in the details. Many of the TIPS products can behave differently from each other in terms of what the triggering mechanism, time period for adjustment, or benchmark for increases to the interest rate paid is – so be sure to read the fine print or ask questions of your financial professional.
Do you see inflation easing in the short-term or will this be a longer-lasting inflationary period?
Inflation is at a 40-year high. We are already seeing gas process come down, but I would expect them to come down more slowly than they went up. The Federal Reserve is aggressively raising interest rates, one of their tools to fight inflation. This action should alleviate inflation but not immediately.
What are some of the common concerns your divorce financial planning clients are expressing right now? Are they different than in less-volatile financial times?
Asset division can be particularly challenging right now. The two major sources of wealth, the home and retirement portfolio, have greatly appreciated and depreciated, respectively, in the last year. Currently, if one spouse is keeping the home and has no near-term plans to sell it, they are effectively having to accept the appreciation in the house, from which they may never materially benefit. In exchange, the other spouse is keeping a larger amount of temporarily depreciated assets that will rebound significantly in the coming years. An equitable division in community assets is likely to result in an imbalance in the future.
What are some concrete actions we can take to protect our overall financial health right now?
Unless you really need cash for a major, short-term large purchase, I would recommend resisting the urge to make many changes to your portfolio, unless you have additional cash you would like to invest as this market shows signs of recovery. However, there are several non-investment changes to consider, such as:
Convert all or part of your 401(k) or IRA to a Roth IRA – You must begin taking IRA distributions in the year in which you turn 72 and the distributions are taxed as ordinary income. If you are retired but still have a 401(k) with your former employer, the same rules apply. With a Roth IRA, you are not required to take distributions, and any withdrawals are tax-free. One positive aspect in the current market is that this could be a good time to convert assets from a traditional IRA to a Roth IRA. Converted assets are subject to federal income tax in the year of conversion, which might be a substantial tax bill. However, if assets in your traditional IRA have had a significant decline in value, you will pay taxes on a lower asset base when you convert. If all conditions are met, the Roth account will incur no further income tax liability for you or your designated beneficiaries, no matter how much the portfolio grows in the future. Consult with your estate attorney, CPA, or financial planner.
Plan to deal with variable lines of credit – With the Federal Reserve raising interest rates, any variable debt, such as a credit card or Home Equity Line of Credit (HELOC), will become more expensive. Look for way to pay these down more quickly or convert the debt to something with a fixed rate. Fixed rates are not as low as they were even a month ago, but they will come down in time, and you can refinance again when they do. The certainty of a fixed rate may allow you better sleep than an escalating variable rate. Contact a financial planner or lending consultant for help.
Get a written financial plan – Consult with a financial planner to create a plan based on your entire financial picture. Focusing on your goals and the probability of achieving them will help you feel more in control, even when the market is volatile. You should reassess your risk tolerance every six to twelve months and rebalance your portfolio to keep it in line with your risk. Consult with a financial professional if you have questions.
If someone is considering or in the middle of a divorce, what are some good financial tips to help them through?
If you have kids, consider creating an account that you and your soon-to-be-ex-spouse contribute equally into for kids’ expenses. That way, you will not have to keep track of which of you has spent how much for what and be in contact more than you would like.
Term insurance policies are often allowed to lapse because the original need for it may be perceived to have changed. If your spouse is currently insured and the two of you have been paying the premiums, you can become the owner and beneficiary of your spouse’s policy. Work together, or with your mediator, attorney, or Certified Divorce Financial Analyst, to facilitate that conversation.
Consider your mental well-being and set aside funds to address it. Whether that is a solo getaway to the woods, a weekend with friends in Vegas, massage and spa treatments, yoga or kickboxing classes, or working with a divorce coach or therapist (or all the above), you need to make sure you are taking care of yourself.
Have a discussion with your mediator or attorney around your budget and set a strategy when it comes to the investment/return of your legal fees. Not every battle is worth fighting, emotionally or financially.
When you have a sense of what your new financial reality will be, work with a financial planner. Your future will be different than the one you dreamed of together with your spouse, and that is freeing. You may want to move, or travel more, or buy a second home. You may be unfamiliar with your budget, or with investing in general. You may be concerned as to whether you can do all of it on your own. Information is powerful. Instead of worrying endlessly, get the facts. Make a financial plan and revisit it at least annually. Make revisions as life unfolds.
Meet with an estate attorney to begin the process of updating your will, trust, and healthcare directive. When your divorce is final, you will be ready to make the changes to take control of your new life.
John Duffy is a Certified Divorce Financial Analyst® and Founder of Zen Divorce Solutions. John helps couples identify, evaluate, and equitably divide assets in a fair and respectful manner during divorce to achieve a peaceful financial separation. Zen Divorce Solutions has offices in Montecito and Del Mar, CA. For more information, please reach out to John at 805-886-1901 or john@zendivorcesolutions.com.