The impact of the Coronavirus has been felt far and wide. In times like these it's understandable that investors, or in fact anyone for that matter, would be concerned about the possible effect this pandemic could have on their finances.
To offer some reassurance in these unusual times we face, our team has pulled together the mostly commonly asked questions on the subject of financial planning and shared their thoughts below, so... let's take a look.
What is our view or take on current situation? When will normality resume?
From a financial planning perspective, we have no control over the outbreak, or the short-term stock market reaction, so we should try really hard not to worry about it. I fully appreciate that this is easier said than done. We all have families and jobs to perform, and we understand that we will all be concerned about the health impact on loved ones and the wider society in general.
It’s important that we should avoid from making emotionally driven decisions and focus on the objective evidence, which is, we should not be taking action at this time. We should stay the course as markets will recover over time.
Of all the particular sectors or asset classes, which will do better when things start to recover, and shouldn’t we be over allocating to these?
Global equities have dropped significantly in value over the last month. When the outlook to Coronavirus improves, it’s likely that these losses will reduce quickly as people regain their confidence in the global economy.
There is certainly an argument for investing new money in higher equity portfolios in order to capture as much of the market recovery as possible, though this should be considered as part of your wider planning, your risk profile and your capacity for loss. It may get worse before it gets better, no one knows.
Another way to gain more exposure to equities is by actioning a rebalance of your portfolios, which will effectively sell the gains of any bond funds and reinvest these into the equity funds that are at a loss. This will also keep the portfolio in line with your attitude to risk as this will drift when there are large movements in the market. If appropriate, your financial adviser will talk to you about this option.
I didn’t plan to sell or need any of my investments, but I am worried about my business and if revenue dries up I may need to draw down on these funds to fill a short term hole, is there a strategy or approach of how best to do this?
It’s important to review all of the short-term funding options available to you and your company. The Government has announced a raft of new initiatives to help business owners at this difficult time. Details can be found here: Government Business Covid-19 Guidance. (First Wealth cannot be responsible for the content of this guidance).
You adviser will help able to help in relation to the portfolio. Broadly, a sensible strategy would be:
- Draw on personal cash and emergency funds first
- Use any cash in your portfolio for smaller withdrawals
- Investments with the smallest losses should be prioritised first
- Draw from bond and fixed income holdings for larger withdrawals, as these funds are likely to be showing better returns in the short term. Try to avoid a significant shift in the risk profile of the portfolio (defined by a 10% swing between growth/defensive assets from original allocation)
- Aim to liquidate the equity investments last – though this could result in capital losses.
If the government has to borrow money for the current crisis, in association with governments around the world, will government bonds become more valuable and would that indicate an appropriate time to go for an annuity?
Our advice shouldn’t change dramatically in this scenario as we would be unlikely to base a client’s entire retirement planning on a single temporary market downturn. In the short term, bond yields are likely to fall (when more people invest in the safe assets of bonds, prices increase, yields go down which in turn leads to a decrease in annuity rates). This situation may change in the future if markets become nervous about the amount of debt countries are taking on the help deal with the situation. No one knows at this stage and we will monitor the situation.
Your adviser will pick up these specific advice areas up at your annual Forward Planning meeting. Additional research and annuity quotes will be undertaken as part of that process before advice is given. The transition to full retirement is clearly a big step, and it’s important to consider all options.
Should we be investing more now? If so, can’t that go down as well?
Whilst the stock markets are down, it presents you with a great opportunity to invest any excess cash that you are holding on deposit, over and above your immediate requirements as you will effectively be buying into the market at a discount.
Yes, the market could still continue to go down, particularly in the short term, however it is important to look past short-term noise for long term gain. The markets always have recovered, and this time will be no different.
Shall I cancel my regular savings plan now?
Unless you have an immediate need for this money, you should not cancel your regular savings plan.
Regular savings benefit from ‘pound cost averaging’, which effectively means that you purchase shares at a lower cost during market falls which provide greater growth potential than units purchased at a higher cost when the market is high. Market falls therefore allow you to benefit from the current situation, and if equity prices rise over the longer term, your regular saving commitment should pay off well in the future.
What can we do to make sure this won’t happen again to my portfolio?
The chances are that as a long-term investor, this will happen again. The stock market tends to experience a short-term fall in value like this every 10 years or so. The only way to avoid this would be to reduce your exposure to the stock market completely; this would then reduce your growth potential and hamper your ability to grow your assets in line with inflation.
Your portfolio was designed taking into consideration your attitude to risk, capacity for loss and time horizon. In addition, your financial plan has been built with events such as this in mind.
Volatility is the price we pay for generating returns, and although uncomfortable at the time, it is a necessary part of investing that cannot be avoided.
The important thing is to practice good investor behaviour, concentrate on the things that you can control and avoid making emotionally driven decisions. Ask your financial adviser, where here to help.