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A Message From Prudent Management Associates

PMA Investment Committee
Published on July 8, 2020

To our valued clients,

We are writing to you now to provide three important updates:

1. Return to In-Office Operations on July 13.

On March 23 of this year PMA sent an email to notify clients of an order from the State of Pennsylvania requiring office workers at any “non-life sustaining business” to cease operations in their offices and to commence operating remotely only.

Accordingly, from March 20 through today PMA has successfully run its operations remotely. We did not experience any disruptions in our normal processes. We continued to closely monitor market developments and to engage in our regular investment processes. We were in regular contact with each other and with clients and had access to all PMA data and resources.

While we certainly did not anticipate on March 20 that a three-and-a-half-month odyssey of remote work was commencing, PMA is pleased that its ability to provide the same high level of client service and investment management was not disrupted by these extraordinary events.

Recent new governmental orders now permit PMA to recommence in-office operations, although with a reduced staff on-site. Accordingly, on July 13, PMA will recommence in-office operations, with most employees working a staggered schedule, in the office on designated days and then remotely on the rest. All employees will continue to work their regular schedules and will be as fully available to clients as previously.

While PMA will have personnel present in its office site as of July 13, our operations must still comply with State requirements, one of which is that client meetings be held wherever possible via technologies such as Zoom video conferencing or similar means; however, if it is essential that we meet in person please contact us and we will endeavor to accommodate such a request while also adhering to social distancing and related orders issued by the State of Pennsylvania.

Finally, if circumstances change yet again and Pennsylvania acts to again forbid in office operations, PMA will of course comply with governmental orders.

2. Further Revisions to RMD Rules for 2020

PMA also sent clients an email message on April 2 providing notice of changes enacted by Congress to established RMD rules. Most significantly, the requirement to withdraw money from an individual retirement accounts was waived for 2020. In other words, for the year 2020, no Required Minimum Distributions (“RMD”) for IRA type of accounts need be taken. PMA advised that we generally feel that people who can draw on other assets for spending needs are, on the whole, better off deferring RMD distributions, as doing so will result in a reduction in taxable income for the year, while giving this money another year to compound tax free.

There have been further recent developments relating to RMD distributions, particularly for clients who may have taken their RMDs early in 2020, prior to the outbreak of the coronavirus pandemic. In particular, on June 23 the IRS issued a notice (Notice 2020-51) which provides guidance regarding the repayment of RMDs under recent legislation. The IRS notice generally provides that RMDs taken on any date in 2020 can be repaid to a retirement account as a “rollover.” An IRA owner or beneficiary who repays an RMD back into the IRA will thereby not have to pay income tax on the RMD amount previously distributed. Furthermore, the repayment of the waived RMD can occur more than 60 days after the original distribution date provided it is made no later than August 31, 2020. Click here to read the IRS notice.

PMA has had a number of clients take advantage of this opportunity to incur an income tax savings. Because the application of these new rules to any individual’s circumstance can be complex, they should be reviewed with a qualified legal or tax professional.

3. Second Quarter v. First Quarter, 2020

Finally, when PMA wrote to clients on March 23, shortly before the end of the first calendar quarter, domestic equity markets were in the middle of their fastest 20% declines in their history, and panic over where and when those declines might end were dominating the financial press. PMA’s March 23 letter ended with this perspective:

We are in difficult and unfortunate circumstances but history and studies have shown that when markets rebound from unpleasant declines is not predictable in advance, and that missing a very few days of the rebound when it occurs has an adverse effect on a portfolio’s performance. As said by Charlie Munger, the partner of Warren Buffett, being able “to react with equanimity” to large equity declines is “in the nature of long term shareholding.” We agree, but we also agree that being able to sleep at night is important, and that if this wrenching experience is causing you to question the risk portfolio you are in, we encourage you to reach out to us.

We did not expect when we wrote those words that the rebound we referenced would occur as fast and furiously as it did in the second quarter of 2020. As stated in the Wall Street Journal on June 30: “U.S. stocks wrapped up their best quarter in more than 20 years, a remarkable rally after the coronavirus pandemic brought business around the world to a virtual standstill. Just three months ago, investors were lamenting the end of the bull market—and the longest economic expansion on record—after major U.S. stock indexes lost about 35% of their value in less than six weeks. The subsequent rebound has been nearly as brisk.”

We recap this history not to suggest that market volatility caused by the coronavirus is over, or that another large market decline could not occur if the pandemic takes a serious turn for the worse, or if some other unexpected negative event occurs, but only to reiterate this central message about PMA’s philosophy: investing for the long term is essential but so is diversification and understanding your own tolerance for market fluctuations. We invite clients to contact us about any of these matters.

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