The coronavirus outbreak has created a time of uncertainty and worry for us all. First and foremost in all our minds will be our health. But many of us will equally be concerned about our personal finances. Will we lose income? Or will our retirement savings survive? It’s good to have the tools available to help you adapt your finances to changing circumstances.
Only a few months ago we wrote about recession fears in the context of retirement planning. Now a recession looks inevitable. It’s time to expand on what we wrote back then.
The instinct to panic
Even the most level-headed among us are tempted to panic in a crisis. But the most level-headed will resist that temptation. As markets tumble in the wake of the coronavirus pandemic, we may be tempted to bail out. But history tells us that’s probably a mistake, just like panic buying during a bubble. Frequent and reactive trading is best left to the experts. Otherwise we’re liable to shut the stable door after the horse has bolted, preventing it from returning.
You may hear advice that you should rebalance your investments. But what does that actually mean? Does it imply shifting from equities to bonds or cash? If you’re overweight in equities, perhaps. But a big stockmarket fall may well have had the effect of already reducing your equity exposure as a proportion of your total portfolio. In fact you might now be underweight in equities. So at some point, rebalancing might mean shifting some of your bonds or cash into equities.
If you’re still working and saving for retirement, it might be tempting to switch to investing only in cash or bonds. But if you do you won’t take advantage of pound cost averaging. At some point the market will turn, but guessing the market bottom is a fool’s game.
The big picture is bigger than the coronavirus
Despite the enormity of the current coronavirus situation, you need to keep your long-term objectives in mind. How important really is leaving a legacy to you? How long do you want to keep working? And how long can you safely assume you’ll be able to work?
You also need to be aware of your risk tolerance. How have the current market gyrations affected you? That’s what we call short-term risk tolerance. But what about long-term risk? How certain do you need to be that your spending patterns won’t eventually make you run out of money?
Based on these considerations, you should rebalance your investments every few months; but not too often, and ideally following regulated advice. You should also consider adopting a bucket strategy, which is one way of structuring and balancing your investments.
Moderate your discretionary spending. Keep your long-term risk of running out of money within your risk tolerance. Of course in these difficult times there may be fewer opportunities for high discretionary spending, so moderating it may come naturally. By doing this you’ll be preserving more assets, which will hopefully enable you to spend more once markets eventually resume a semblance of normality.
Help is at hand
Maybe you’re already using the unique retirement planning tool from EvolveMyRetirement®. If so you’ll know that it can juggle all these and other variables to arrive at an optimised strategy. If you haven’t optimised your strategy since before the market falls, it makes sense to do so again soon. First update your plan to make sure it reflects the current situation. Optimising will then help you arrive at a sustainable level of spending. It will also indicate any rebalancing that may be prudent.
It’s important to look ahead to life beyond the coronavirus.