Reducing the impact of coronavirus-related financial shocks
Even at the start of February, it would have been hard to imagine just how much COVID-19 would affect our daily lives.
But here we are in May in lockdown with (understandable) restrictions on our daily lives, a global stock market decline, and widespread concerns about job security.
Economies around the world are experiencing the pain caused by the spread of coronavirus, and while uncertainty is the watchword, the Bank of England has warned the UK economy is heading towards its sharpest recession on record.
It adds the coronavirus impact would see the economy shrink 14% this year, based on the lockdown being relaxed in June.
It is important to bear in mind though that we have seen economic downturns and stock market crashes before.
In 2008, the global financial crisis saw global equities fall in value by 40%, according to MSCI World Index. It took around five years for global equities to recover to pre-crash levels.
Between mid-February and mid-March this year, global equities had fallen in value by similar levels to the 2008 financial crisis. While the Bank of England says UK growth is expected to rebound in 2021 to 15%, the size of the economy is not expected to get back to its pre-virus peak until the middle of next year, although there are no guarantees.
Stock markets are an emotional rollercoaster that go through peaks and troughs and while how things will pan out, in reality, remains to be seen, history tells us that this too shall pass.
Weathering the storm
Economic storms can cause stress and anxiety for investors. Our aspirations and financial goals become realigned, and we are now in survival mode.
In 2019, many of us were thinking about replacing cars, foreign travel, a new house or life beyond work. Now those thoughts have been replaced with the likes of paying the mortgage, putting food on the table, and staying gainfully employed.
As a Financial Planner, I have spent my career helping people achieve “financial independence”, a journey to financial security, where money works for you and not the other way around.
The evidence still points towards equities reliably producing real returns above inflation over long periods of time, therefore exposure towards equities in a growth portfolio, be it pension or ISA, is likely to increase the probability of a successful outcome. This remains as true today as it was last year or any other year.
Tips to get through this challenging time
- Look again at your expenditure — this is likely to be lower given many of our luxury expenditure items are out of reach at the moment such as holidays, socialising, eating out, sports and gym memberships
- Consider mortgage and council tax holidays if your earnings have been affected
- Avoid unnecessary and discretionary expenditure. If you are spending more time on Amazon, think twice before you click ‘buy now’
- Don’t replace your car as often as you have in the past. If it’s still running well, consider keeping it for at least one more year
- If you do need access to capital, avoid drawing from assets and funds that may be undervalued at present, and that includes most equity and property funds. Instead, draw from defensive assets, such as fixed interests, that provide a hedge against stock market volatility
- If you are over 55, you can take a lump sum from your pension, either tax-free or taxable
- Focus on the long term and update your financial plan with opening balances set at the current lower value to stress test your ability to achieve your long-term goals, and your Financial Planner will be able to provide all the guidance you need here
- Continue to focus on the long term. Those familiar with bagging Munros will know to look at the summit rather than their feet, during their journey
- If you do have surplus wealth and this has been tested, there may be options for gifting to family members or charitable causes.
These are uncertain times that can affect our happiness and wellbeing. The chances of sticking to a financial plan and good financial habits can be significantly improved with the help of a financial planner.
Kevin Mackenzie is a Financial Planner at Acumen Financial Planning.