We’re in the middle of history right now.
I won’t sugar-coat it: things are bad, and they’re going to get worse. I’m allergic to making predictions of this nature, but I think the current downturn will be worse than the Global Financial Crisis in 2008.
Unlike the GFC or most other financial crises, our current situation is unique because there is clear, definable reason. We’re in the middle of a pandemic that is likely to result in a lot of heartbreak.
There will be significant economic ramifications. The exact nature of these remain to be seen.
Because of all of these changes, you might need to make some changes to your financial plan, including your investment strategy.
Don’t make changes based on predictions about the sharemarket
I will never suggest that you buy or sell shares based on whether they are priced “high” or “low” or because the time is “good” or “bad”.
Recent events have caused me to scrutinise my beliefs (I’ll write about this soon). But my philosophy when it comes to buying shares is unchanged: by the time you decide to buy or sell a share, all relevant available information and the consensus view of future expectations is going to be built into the value of that share. Or at least, we might as well treat the sharemarket in this way: the market may be inefficient, but it’s inefficient in ways we can’t predict.
Good luck if you think you can do better than the market, and if you’re looking for someone who thinks they can do it, I’m not the financial adviser or blogger for you.
Having said this, it may be appropriate to consider changing your investment strategy. But it’s not because of the current value of the share market, or any expectations about what shares will do in the future.
Invest in the way that’s right for YOU
When I recommend that you should invest in shares (or more specifically, a managed fund which invests in a widely-diversified basket of shares), I only make this recommendation if it’s appropriate for YOU.
My advice is always oriented towards YOUR circumstances, needs, objectives, values, priorities, and concerns.
For example: to what extent is your income going to be impacted?
It’s quite possible that your personal circumstances have changed or will change. Your needs and objectives may also need to adjust to accommodate this new situation.
Because of this, your investment strategy may need to change, too.
Economic activity has slowed down, and it’ll slow down further.
Some businesses will see their revenue fall substantially. Some businesses will become insolvent. Many people will lose their jobs.
My heart goes out to the many households and businesses in a difficult position right now.
If you expect that your household income may reduce, in part or substantially, this is likely to change your cash flow expectations for the short- to medium-term.
If your short- to medium-term cash flow expectations are likely to change, your investment approach will probably need to change.
Am I recommending that it might be appropriate to invest some of your funds more conservatively? Probably.
Am I making this recommendation based on a prediction about investment returns and what the future holds in relation to financial assets? No.
If your cash flow situation isn’t going to be as rosy as you thought it would be, it’s likely that I’d recommend a more conservative investment approach because your circumstances have changed.
By extension, your needs and objectives are likely to have evolved as well.
A case study: my situation
Take my household, for instance. I wrote the first draft of this email a week ago, and I thought it was likely that my wife will need to stop working for a period of time. I’ve been proven correct. She’s the main breadwinner in our family. Our cash flow needs are likely to change substantially over this period of time.
I recently described how we money. In light of our changed cash flow situation, we will need to make some changes.
To the extent my wife continues to generate income, we will probably reduce her KiwiSaver contributions to 3%. We currently make much larger repayments to our mortgage than we need to, and we will stop making those additional repayments. We will stop investing funds in a growth-oriented manner, and we may even redeem some of these growth-oriented funds, even if it means crystalising some of the losses that we’ve incurred in the past few weeks. This is because, at the moment, our priority is having cash on hand to meet our day-to-day living costs.
If we were really concerned about whether we’d be able to support ourselves, we would be in touch with our bank to see if we could reduce mortgage repayments further. We would even consider switching one of our KiwiSaver funds to a more defensive approach on the basis that we might need to make a financial hardship withdrawal at some point in the foreseeable future. It’s almost certain we won’t need to do this, but I include these comments for completeness and your own consideration.
I’m not sure whether my income is likely to reduce. At the very least, I have a fair amount of work I can continue doing from home. However, it’s not quite enough to support our entire household. If we could live off just my income, none of these changes would be necessary.
These sorts of changes to your investment plan are legitimate if you make them in light of changes to your personal circumstances, needs, and objectives.
My household isn’t alone. Yours may be the same.
Have your needs and objectives evolved?
In the event of a zombie apocalypse, my more abstract goals would go out the window. My focus would be on survival.
The situation we’re in may seem grim. But fortunately it’s not that drastic.
However, my goals have already shifted:
- I’ve got no interest in buying a second-hand Porsche Cayman at the moment. (Or even something more mundane: I’ve had my eye on Mazda CX-5s lately.)
- I was looking forward to a daddy-daughter trip to London in April and a family cruise to Fiji in June. They’ve been cancelled. In other circumstances, this would have been devastating. But right now, travel is the furthest thing from my mind.
- My number one priority is my health and safety, and the health and safety of the people I love.
On this point, I’ll make an observation. For all this talk about “flattening the curve”, the reality is that without extreme action, the hospital system is going to get swamped very soon. This Imperial College paper (which will probably be out-of-date by the time you read this) suggests that, in the US and the UK, the worst-case scenario is a situation where hospitals will be 30 times over capacity. The best-case scenario is “only” 8 times over capacity. This is terrifying.
Unless we’re very fortunate, there isn’t going to be enough capacity (in terms of beds, ventilators, and perhaps even staff, many of whom will be sick or working well below peak performance) to deal with the sudden influx in COVID-19 related patients, let alone any other presenting health issues. In light of this, the next few months are a time where you really don’t want to need hospital attention. Taking care of ourselves, staying healthy, and taking fewer physical risks than usual over the coming months should be a priority, even more than usual.
- I feel some sense of obligation to the community, which I’m finding hard to articulate and channel. At the very minimum, I’m expressing this by “social distancing” as much as possible. I stopped meeting clients in person a couple of weeks ago. My wife and I also took our children out of school before they closed down.
- Even my goals relating to Fairhaven Wealth have changed. If my wife isn’t working, generating a reasonable income will become a higher priority. However, from a broader perspective, I feel compelled to work out how to scale and provide assurance to lots of Kiwis, to make them feel a little more comfortable and confident, and not make decisions against their own best interests, in these trying times. (Watch this space.)
- From a longer-term perspective, I’ve accepted that this period of time is going to be a setback, at least from a financial perspective. My personal goal is to minimise the setback as much as possible, and to make sure this isn’t catastrophic for our household. In other words, defence is more important right now than attack.
Make sure this is a setback and not a catastrophe
My perspective is that we are at the start of a unique chapter in history. It’s also a unique chapter in all of our lives.
If we can get through this with our health, and without going too far backwards financially, then that will be a win for me.
If it means my wife and I will repay our mortgage a little later, we go on one or three less holidays, and we end up retiring a little later than we otherwise would have, then so be it. There are worse things in life.
In the meantime, I’ll make sure that we don’t stop paying insurance premiums (since we may not be able to get the same terms again if we later decide we can afford it). We’ll also make sure that we don’t get left behind in our careers, by continuing to build our human capital.
Try to find a silver lining
Many people experience terrible things in their lives. The scars tend to heal over time.
Many people also look back at these events and say that although it seemed terrible at the time, it ended up being one of the best things that happened to them.
One of my clients emailed me, reflecting that “this time is a great opportunity to appreciate what is really important – family, friends, eating well, exercise, hobbies, etc. That is what really matters, money will come and go”. I couldn’t agree more.
Maybe you won’t be able to earn as much for a while. But maybe this will give you more time to spend with your loved ones or doing activities that you otherwise don’t have a chance to pursue.
As one chapter in the bigger story of your life, you might be able to reframe the situation as a sabbatical, an extended staycation, or a mini-retirement.
If you step back, you might be able to find a silver lining in everything that is ahead of us.
Planning for the next crisis
It seems like Hong Kong and Singapore have been dealing more effectively with COVID-19 than most other countries. This might be because they suffered the SARS outbreak of 2003. It appears that these two countries learned some lessons and have implemented these lessons to restrict the growth of COVID-19 more effectively than other countries.
As absurd as it seems, the SARS outbreak may have had a silver lining for these countries.
One of the important things in life is to learn lessons from our experiences.
When it comes to pandemics, I hope we learn lessons to reduce the likelihood, and increase our resilience in the face, of future pandemics that could be much worse than COVID-19.
At the personal level, for most people this won’t be the last crisis you live through. There will be others crises.