The impact of Covid-19 has been felt throughout the UK. In times like these it’s perfectly understandable that investors, or anyone for that matter, would have concerns about the possible effect the pandemic could have on their finances.
To offer some reassurance in these unusual times we face, we have pulled together the most frequently asked questions on the subject of financial planning and shared our thoughts below.
“Should we invest more right now? If so, can these investments go down as well?”
When the stock markets are down, it does present us with a great opportunity to invest any excess money that you are holding on deposit, over and above your immediate requirements as you will be buying into the markets at a discount.
The market could still carry on going down, particularly in the short-term. However, it is crucial to look past the short-term noise for long term gain. The markets always have recovered in the past, and this time will be no different.
“What is your view of the current situation? Do you know when normality resume?”
From a financial planning perspective, there’s nothing we can do over the outbreak, or the short-term stock market reaction, so, as hard as it may seem, we should try not to worry about it. We know this is easier said than done. We’ve all got 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 crucial that we avoid making any emotionally driven decisions and focus on the expert advice, which is, we should refrain from taking action at this time. We should carry on course as markets will recover over time, history shows this.
“Of all the asset classes or particular sectors, which do you think will do better when things start to recover, and should we be moving our investments over to these?”
Global equities have dropped dramatically in value over the last few months. When the current climate improves, it’s very likely that these losses will reduce fairly quickly, as people regain their confidence in the global economy and money starts moving again.
There is an argument for investing new money in high equity portfolios in order to take a real advantage of the market recovery as possible, though this should really be considered as part of your wider financial planning, your risk profile and indeed your capacity for loss. It could get worse before it gets better, no one really knows.
Another potential way to gain more exposure to equities is by carrying out a rebalance of your portfolios, which effectively sell any gains on bond funds and reinvest these into the equity funds that are at a loss. This also keeps your portfolio in line with your attitude to risk as this will drift when there are large movements in the market. We know a great financial adviser in Leeds who can help with this and talk to you about this option.
“If the government is forced to borrow money for the current crisis, in association with governments around the world, would government bonds become more valuable and does that indicate an appropriate time to go for an annuity?”
Our advice doesn’t change dramatically in this situation, as we wouldn’t base a client’s entire retirement planning on one single temporary market downturn. In the short-term, bond yields are very likely to fall (as more people invest in the safe assets of bonds, the prices increase and yields go down, which in turn dictates a decrease in annuity rates). This situation could change in the future, if markets become apprehensive about the increasing amount of debt that countries are taking on to help deal with the current situation. No one knows at this moment in time.
Your financial adviser will pick up on these specific advice areas up at your annual Financial Planning meeting.
“What can I do to protect my portfolio from this happening again?”
Chances are that as with any long-term investment, this will happen again. The stock markets tend to endure a short-term fall in value like this every decade or so. The only real way to avoid this would be to reduce your stock market exposure completely; which would then reduce your potential growth and hamper your ability to grow your assets in line with inflation.
Your portfolio was structured to take into consideration your attitude to risk, capacity for loss and length of time. In addition, your financial plan has been designed with events such as this in mind. Your financial adviser should have shown you a cash flow model of your investments, which take these situations into account.
Market volatility is the risk we take for generating returns, and although they are very unsettling at the time, they are a necessary part of investing that can’t be avoided.
The important thing is to continue to practice good investor behaviour, focus on the things that you can control and avoid making emotionally driven decisions that can bite you later on!