A Hard Stop: The Economy and RBI’s Target Funds

This is our third update on the impact the coronavirus pandemic is having on your investments.  In our last update, we mentioned that PCA Retirement & Benefits (RBI) was taking unprecedented action to mitigate the impact of this growing threat to our employees and making certain our pledge of service to the employees of the Presbyterian Church in America (PCA) continues without change.  We are happy to report that our immediate response of sheltering in place and moving 100% of our employees to a work-from-home format has kept all of us safe from infection.  God’s grace during this time has enabled us to respond to questions from retirement plan participants largely without interruption.

RBI has been in regular prayer for PCA pastors and church employees we know who have contracted COVID-19.  While the impact is widespread, we are particularly heartbroken by the reports we read coming from the New York City metropolitan area.

At this point, we know infection cases and deaths will continue to grow across the country until sheltering in place policies ultimately slow the progress of this disease.  There are early glimmers of hope that rates of new infections may be slowing, yet the peak of new cases and deaths are still weeks away.

The economic implications of separating our population through required sheltering in place has brought the US economy to a hard stop.  There is no precedent for our current experience.  The closest was 9/11, which was much shorter in duration than will be the current pandemic.

The initial impact of the pandemic has already been experienced.  Job layoffs have been modest thus far, but much larger numbers are coming by May and June.  The recent stimulus package passed by Congress will be quite helpful, but as many as 18 million jobs are under threat.  The next impact will be felt when people realize they are worth (in dollars) less than they thought.  Meaningful portions of nest eggs will have evaporated and what is known as the “wealth effect” will come into play.  Near-retirement baby boomers in particular will significantly cut back on their spending, especially if they have been overly aggressive in allocations to stock market investments.  The final impact is simply an all-out effort by businesses of all types to weather this storm.  This reaction is chiefly measured by business sentiment surveys which are currently at levels last seen in 2008 and 2009 (the Great Recession).  Despite their best attempts at saving their ‘ships’, there will be some business owners who will not recover.  These companies will fall in the general category of what we call low capitalized businesses (not enough money in the bank).

The preceding economic summary is not new news to professional investors.  In fact, the recent extreme volatility we’ve seen in the financial markets has been a function of the markets resetting to a valuation representing the new, post-COVID reality.  This simply means that the stock market is generally viewed as a leading economic indicator.  It attempts to “lead” or forecast future valuation-changing events by adjusting current market prices accordingly.  This is why market-timing is a such a hazardous investment strategy.  Please don’t try it!

As most should know by now, RBI advocates a long-term approach to retirement planning and investing.  The PCA Target Date Funds (TDF) is our preferred savings vehicle for managing retirement savings over the course of a lifetime.  Why is this?  Managing a savings program over the long-term requires quite a lot of professional expertise.  A few major portfolio management challenges include:

• Selecting investment managers for each major asset class.
• Determining, through proper analysis, the optimal asset allocation for every stage of life.
• Rebalancing the portfolio when market values change the optimal asset allocation.
• Do all of the above at a very low cost.

PCA TDFs are designed to do all of the above at a low cost.  One of the best things about the TDFs is that investors will experience increasingly lower volatility as they move closer to pre-retirement and into post-retirement stages of life.  To illustrate this, we recently charted the return impact of our TDFs from February 22, 2020 until March 27, 2020. For the sake of readability, we have only included the TDFs with vintage dates that are divisible by 10.   Below you can see that while all funds lost money during this period, those TDFs designed for pre and post-retirement investors were down much less than TDFs designed for younger investors  (Harvester Fund: -7%; S&P 500: -25%). The design is based on the fact that younger investors have the time horizon to recoup investment losses while older investors do not.

Please contact us if you have questions or concerns about your investments.  And please resist the temptation to deviate from a careful, long-term investment strategy. In the aftermath of a crisis, it is often tempting to make drastic changes to your portfolio. We believe this is a major mistake for most people, and strongly advise patience. This allows the TDFs to do what they were designed to do – mitigate risk and recoup losses over time. We are convinced that when this pandemic ends those who have remained focused on a long-term investment strategy will be in the best shape financially.  May God bless all of you and please stay safe and healthy through this horrible pandemic.