By late last week, there had been more than 400,000 diagnosed cases of COVID-19 in the United States. The increase in these cases will become exponential, significantly increasing the number of virus-related deaths. If we would have acted faster and been more prepared, the number of deaths would be much lower.
That paragraph contains three basic elements — a fact, an inference, and an opinion. A fact should be indisputable since it is purely descriptive. An inference should be based on some analysis of the fact and involves an interpretation. But an opinion is an ideology. When we are making choices that affect our futures, it is useful to understand which of the three are guiding our behaviors.
The inference that an increase in deaths from the virus is inevitable is tragic. The strategies around dealing with this may come down to an opinion on the value of lives and what we’re willing to tolerate. We infer that slower traffic speeds can save lives but we have not set 35-mile-an-hour highway speed limits. Decisions around how much social distancing, in what way and for how long are ideological decisions between how people will deal with considerable economic loss and potential life-or-death health decisions. Trade-offs are necessary.
So with this in mind, the fact is that in the past three weeks, almost 16 million people have filed for unemployment. The inference is that claims will continue to rise as more businesses lay off people or completely close shop. A huge aspect of the stimulus bill was to enhance unemployment benefits because this would create a softer landing for those without work, thereby allowing the benefits of social distancing to take effect. The rise in claims, in my opinion, means that for that particular need, the stimulus is working.
The trade-off will be a higher deficit. Some people believe that this will lead to inflation. I don’t think that this will soon happen; it is my opinion that we will most likely see higher tax rates when the economic recovery takes hold. An opinion affects strategy, though. If there are going to be higher tax rates, then Roth IRAs and Roth conversions are attractive because Roth dollars are taxable going in but untaxed coming out. Higher future tax rates mean gifting strategies become more important. This is especially true if you are in a financial position to help out children who are running into a rough patch. If my opinion is wrong, then you may have unnecessarily paid a tax or made a gift today. The cost of being wrong in this situation is relatively low, since taxes on non-Roth retirement plans will eventually have to be paid anyway, and helping children is always a choice.
This is a key point. When an opinion leads to strategy decisions, how can you reduce the expense of the mistake?
Let’s look at the stock market. The fact is that the S&P 500 52-week high was around 3,398, and its low (reached just a few weeks ago) was 2,192. As the market dropped, the stimulus plan went into effect. So far, it looks like some of the benefits from the changes in monetary and fiscal policy have helped steady the market. This doesn’t mean that the market will stay steady. There are a number of twists and turns that can cause uncertainty. But if you have extreme opinions in either direction — the virus will lead to big economic hardship or the effect of the stimulus will be so significant that the economy is going to quickly rebound — you are turning a complex situation into a binary one. If your opinion is wrong, you have potentially made a costly mistake.
Some of you panicked and got out of stocks when the virus hit and the inference for the numbers of cases and deaths was startling. As the markets have rebounded, you may be trying to figure out how and when to get back in. In these types of markets, since no one can possibly know when things will turn around, it is helpful to divorce yourself from your extreme opinions and stick with a strategy that will position you for when the markets eventually recover. If you sold out of stocks, start putting money back in on a monthly basis until you reach a sleep-at-night factor of stocks, bonds and cash. If you need to take action, rebalance when things get out of whack. Stop having your opinion take control of your financial life.
It is a fact that markets are more volatile than they have been over the past several years. This infers that there is no clear direction on which everyone agrees. It is my opinion, that while this started with the virus, it will end in an economic recovery — we just don’t know how long or what path it will take. But it will involve facts, inferences and opinions.
Ross Levin is the chief executive and founder of Accredited Investors Wealth Management in Edina.