How robust is your financial plan? Dealing with COVID-19 | Merchant West

Articles | How robust is your financial plan? Dealing with COVID-19

It is 26 March 2020. At midnight tonight we enter an unprecedented lock down in our country’s history. The coronavirus (COVID-19) outbreak which started in Wuhan, China has brought back unpleasant memories of the SARS outbreak in 2002 and the MERS outbreak in 2012, both of which had resulted in investor stress, anxiety and fear. Most of the concerns centred around whether their investments can withstand the short-term market fluctuations and volatility as well as not knowing how long this uncertainty would last. Global and local equity and credit markets have sold off significantly; the S&P experienced the fastest 30% fall in its history. Think about that! 

In South Africa and elsewhere globally, the authorities have implemented measures to minimise the spread of COVID-19 in their respective countries and help stem the global spread of the virus. These include putting in place controls on the entry of visitors into many developed and affected nations.

As retail investors, we should also have robust measures to safeguard our savings and assets that are able to withstand short-term shocks and volatility. Doing so will go a long way in preventing any adverse knee-jerk reactions and impulsive investment decisions. It gives us a peace of mind so we can avoid giving in to unnecessary panic and sleepless nights. Thus, we have summarisied the six most useful strategies to help you manage your finances during this period of uncertainty. 

6 tips to help you withstand the uncertainty:

#1: Have a sound financial plan

With a proper financial plan in place, we will have a better understanding of our financial resources such as our money flows and where our investments stand in the risk-reward continuum.

A comprehensive financial plan covers the areas of managing budgeting, insurance, investment, retirement and estate planning. When these areas are well covered in a sound financial plan, we need to have greater clarity on how each financial decision affects another and we can adapt more easily to life changes, while keeping our life goals intact.

#2: Ensure you have positive cash flow and emergency funds

The foundation to financial wellbeing is to maintain a positive cashflow which can be invested in suitable instruments to make our money work harder. To do this, it is always prudent to set up a realistic budget which indicates your money inflows and outflows.

Having at least three to six months emergency funds in cash helps to ensure that you have enough liquidity to tide you and your dependants over during financially challenging times. Doing so will give you some peace of mind even if you suffer from say temporary setbacks like losing a job or are unable to make a living because you are in lock down. Many of our retired portfolio clients will have many years of income requirements allocated to cash and other fixed interest positions. This prevents the forced sale of any growth or highly volatile assets.

#3: Get insurance cover

Insurance is a means to cushion against financial loss due to specified events. Top of the list is a suitable medical aid and gap cover, if necessary. Other healthcare related insurance includes critical illness and income disability cover.

#4: Diversification

A basic rule for retail investors is not to put all our eggs in one basket. As such, an investment plan should not be reduced to a single stock or a single investment strategy. It is prudent to diversify your assets and ensure a good mix of investments that carry different levels of risks, depending on your risk profile and financial needs.

Do not over-concentrate on single securities and single-country assets. It is wise to seek the guidance of a professional financial adviser for this process and who can also help to do portfolio rebalancing when required.

Once you have your optimal asset allocation in place, you will be able to sleep peacefully even during times of uncertainty because you know that your risk exposure will be taken care of. A sound and diversified portfolio will be able to weather the ups and downs of market uncertainty such as the one we are experiencing due to COVID-19.

#5: Use Rand-cost averaging

Adopting the strategy of Rand-cost averaging helps investors to avoid the pitfalls of timing the market. It involves regularly buying a fixed Rand amount of an investment, regardless of the unit price or the share price. By doing so, you buy more shares or units when prices are low and fewer when prices are high. So over time, you will have a lower average entry price.

This helps investors to stay invested even during tough times since they keep getting a lower average price.

#6: Invest for the long-term

We cannot be sure how long the COVID-19 outbreak will last and how it will impact the markets. However, history tells us that financial markets have bounced back time and time again, and we expect this to be no different.

Already the global and local markets have bounced significantly off their lows. Many of our investors have taken this depressed opportunity to buy potentially undervalued assets. The local listed property market has fallen by around 50%. This is a dramatic fall from grace for a once loved and revered asset class. This, again, shows the danger of relying on a single sector to provide either returns, or income into retirement.

By Graydon Morris

Managing Director 

Sterling Private Wealth

 

For more information on how we can help you manage your wealth, visit us on www.merchantwest.co.za/wealth-management