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 typically undertaken by professional traders. 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 could involve shifting the proportions of different asset types.
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, it can be helpful to keep 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?
It’s also important 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?
Some people review and rebalance their investments periodically, often with regulated advice. Another approach used by some is the a bucket strategy, which offers a way of structuring and balancing investments.
Discretionary spending often reduces naturally during periods of uncertainty, which can ease short‑term financial pressure. Of course in these difficult times there may be fewer opportunities for high discretionary spending, so moderating it may come naturally. This may preserve more assets, potentially giving you greater flexibility when conditions 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 analyse all these variables to generate a modelled strategy. If you haven’t regenerated your strategy since before the market falls, you may find it informative to do so again. First update your plan to make sure it reflects the current situation. The updated modelling can help you explore sustainable spending levels. It can also highlight how your asset allocation might evolve under different scenarios.
It’s important to look ahead to life beyond the coronavirus.