Why you should keep your cool when the headlines scream drama…
I’m sure you’ll have seen your fair share of dramatic headlines since COVID-19 was declared a ‘pandemic’ by the World Health Organisation (WHO). While it is cause for action from a health and wellbeing point of view, when it comes to your finances, you should keep calm and stick to your long-term goals.
Cause for concern?
Yes, markets have responded dramatically since the start of the year and we’ve seen some steep drops. The S&P 500, NZX 50, and ASX 200 all fell around 30% from their February highs, in the space of a month. We are staring down the barrel of a global recession (two negative quarters of GDP growth) and this is being reflected and priced in markets. We can expect volatility to continue, while the extent of the spread of the virus continues to be updated daily.
The next few months (and maybe longer) will be rough. Markets will continue to rise and fall and other economic indicators – like unemployment and GDP – will be worrisome. The media will have a field day with dramatic headlines and scary-looking graphs that will test everyone’s resilience.
But, at some point, things will get better.
Both the Australian and New Zealand governments have announced stimulus packages, as have the US, UK and other countries. After many months in lockdown, China appears to be flattening its epidemic curve and there are early signs of productivity – it’s hard to get solid data from China, but the country does appear to be gaining ground again after the lows of the last few months.
Since WWII, every recession has been followed by years of market growth. There’s no reason this recession will be any different. The drop we’ve seen in recent weeks looks dramatic on a graph with a short-term scale. But, if you look at the graph below showing S&P 500 downturns of more than 10%, you’ll see a gradual increase and occasional ‘dramatic drop’ in the years since WWII:
What you’ll notice is that there’s still a gradual upward trend. Even when there’s been recessions – like the one in the 1980s, the GFC in the late 2000s and other global events – the upward trend has continued. The moral of the story is: so long as you keep your cool and follow some basic steps, there’s no need to get whipped up into a frenzy.
A few basic steps
1. Put your adviser to work
One person can’t be an expert in everything and now isn’t the time for you to try to become a financial specialist. Focus on what you do best, continue to support your patients and the wellbeing of you and your family. Let your adviser focus on your finances – it’s times like this when they really make a difference. They won’t pick stocks or predict market changes (see a fortune teller for that), but they will give you sound advice on how to achieve your financial goals and steer you away from bad decisions.
2. Follow the plan, it’s there for a reason
Together, we built a strategy for a reason; to make sure you achieve your goals and objectives in the future. If the target hasn’t changed then there is no reason to change the strategy based on several weeks’ volatility. Planning is based on a timeline that lasts for years and built on calculated assumptions that take market movements (like those we’re seeing now) into account. Equities are volatile, which is why well-constructed portfolios include other asset classes. If long-term equities are a key part of your portfolio, it’s still important to stick to the plan: there’s a strategy in place for this sort of market movement.
3. Manage risk, don’t let it manage you
It’s important to manage risk, not avoid it. We manage risk in daily life and investing is no different. You should have a diversified portfolio that factors in your timeline, goals and appetite for risk. Make sure that you have the right amount of liquid assets to call on if you need access to cash, so you aren’t forced to sell your riskier assets at a loss. At times like these, your lower risk assets (like cash and fixed income) will provide a buffer to the downside of equities and some may have increased in value. Ensuring your strategy manages risk well means you won’t be forced to abandon your plan at the wrong time.
4. Don’t try to be a fortune teller
With so much uncertainty it is easy to imagine a scenario where the market falls further. About a month ago, we were at record highs. The drop happened quickly and any recovery could be equally as quick. What isn’t easy is to predict is when it will stop, or when it will turn around again. Market prices reflect the collective view of future earnings and can rebound well before we feel a different sentiment in daily life. Evidence shows that it is hard to predict the future – when the market will change, when to get in or out. During the GFC, the S&P 500 hit its low point in February 2009, but was up over 50% within 12 months. Between 1991 and 2019, $1 invested in the S&P/NZX 50 Gross was worth $18.64 but if you missed the single best month each year it was only worth $2.92. In short: you don’t want to get the timing wrong and it’s near-impossible to guess when the ‘right’ timing is. What you need is a solid plan and the right portfolio.
5. Diversify, diversify, diversity
Asset allocation is really important. A good portfolio is constructed with the right combination of asset classes and the right assets within each. Having the right assets isn’t about trying to pick which ones to have at the right time, or flicking between equities and cash (that’s one way to miss a free lunch!). Get the right mix of equities, property, fixed income and cash across multiple geographies and sectors and you will be well placed to achieve your goals regardless of what the market is doing at the time. (Hint: ask your financial adviser about this).
6. Keep your cool
In the midst of a huge amount of information being reported in the media, it is important to remain calm and focused on the things you can control and to take a measured, disciplined approach to your finances. It’s easy to see the news after a long day at work and feel overwhelmed with all the negativity however, as you know, we make our best decisions when we remain calm. If you are still feeling uneasy, give you financial adviser a call – that’s why they’re here.
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Note: This article is for general information purposes only. The information is given in good faith and has been prepared from sources believed to be reliable, accurate and complete at the time of preparation, but its accuracy and completeness is not guaranteed. Any information, analysis or views in this article, represents my opinion at the time of publication and are subject to change without notice. It does not constitute personalised or legal advice and to the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this article or its contents.