#CORONAVIRUS: Financial Special - what should I be doing?
Updated: Apr 29, 2020
With stock markets in free fall, what should I do?
Firstly, in the words of The Hitch Hikers Guide to the Galaxy "DON'T PANIC!"
Yes, at the time of writing most markets are down around 25% from all time highs, but most of them have recovered 10% from the initial shock drop.
Are they going to go lower? Quite possibly. Please ignore the advice of anyone who says that they categorically know the answer to this one. They don't.
There is obviously a huge human cost to Covid-19, but I am going to purely restrict myself in this blog to the financial implications. That being said, I just want to mention that we’ve all been very aware over the last few years that the world has big problems. The 3 most obvious ones, probably, being:
* Global environment issues
* Re-distribution of wealth needed
* Over population
Now I’m not in any way a religious person, but the Coronavirus seems to inadvertently be re-balancing all three in a non-too subtle way. Although I don't believe there is a man upstairs pulling the strings, it is strange how life seems to have a natural way of adjusting any imbalances. Maybe Darwin was on to something ...
Anyway, that's too big a topic for now. Back to the shallow subject of money!
Just remember at all times that you have not suffered a financial loss, until that loss is realised. That goes for pensions, ISAs, shares or houses. Until you have sold an asset at a lower price than you paid for it, you have not actually lost any money. Please breathe slowly - in through the nose and out through the mouth - and read on ...
I just want to say initially, that like everyone else - I did not see this coming. In finance you get a lot of hindsight experts who will tell you about all their imaginary investment trades they did after an event has happened. Bulls**t. Almost nobody saw this coming. Back in November/December I thought the markets were over-valued and couldn't understand when news first broke out of China about the virus, why the stock markets remained strong for so long, but did I do anything about it? Sweet F-A - with the exception of not putting any money into ISA's because I thought the markets would come lower before the financial year end. Too right they did!! (This is the equivalent to a man watching his house burn down around him, but saving his favourite armchair).
This blog is not going to tell you what you should have done back in December, it's been written to tell you that now it's happened, what you should be doing now.
In order to carry out my Escape Plan, I had to try and put in place a safety net to cover any eventuality. When the panic button gets hit, the two biggest lifelines whether you're a business or an individual are:
CASH FLOW (LIQUIDITY)
I have to say, I very quickly discovered that my first safety net had some very big holes in it. It's all very well being diversified, but for a catastrophic event such as coronavirus, it provides very limited protection. Almost every asset class has been hit. Even if you've put your eggs in lots of different baskets, if every basket is being poked with a very big stick some of those eggs are going to get broken. Unlike 9/11 and the financial crash of 2008, when the stock market got hit other sectors went up. Aside from possibly gold, and shares in Zoom or Netflix almost everything else is now worth less than it was pre-Corona. Don't be fooled into thinking that just because stock markets have an index value, and easily measurable, they are the only thing that is down. Your house, your car, even your job (in terms of the financial return you will get for doing it) is most likely down. The question is whether it's a temporary lowering of value or something more long-lasting?
Fortunately, my safety net did have a safety net below it. I've kept myself reasonably liquid throughout this period of adjustment and change of life plan because there are so many variables and unknowns out there (even before corona virus!). And yes, I am very aware that I'm in a fortunate position to do that. But no matter what you're earning you should always make every effort to build up some rainy day savings because you never know when you might need them. After all, the definition of saving is simply putting aside money today to pay for an obligation tomorrow.
Even during normal economic times, most companies fail through cash flow issues rather than lack of revenue. But whatever your reserves - unless you're Bill Gates or Jeff Bezos - they are finite. So, surviving this lockdown period is going to be all about remaining liquid for as long as you can, whether you're a business or an individual. And nobody knows yet how long that will be.
So as an individual, the best way to keep hold of cash is simply not to spend it, so what can we do?
First of all, make a spreadsheet of all your monthly out-going expenses, and look for any payments that can be reduced or completely cut. Remember, this is about surviving this period of time. It’s not forever. Direct Debits can always be re-started. The goal is to provide yourself with as much access to cash for as long as you can, to ride out the storm. If the expense is not feeding, hydrating or maintaining your physical and mental health over this time – do you need it?
Mortgages – most mortgage lenders are allowing at least 3 month payment holidays. With most lenders these can be applied for online. Do not bury your head in the sand - you're far better communicating that you have a problem than hoping that it will just go away, because it won't.
Tenants – If you’re struggling to pay the rent, speak to the Landlord. Again communication is key - don’t just stop paying. Despite the bad press, most landlords are reasonable people.
Car owners – do you need a car during lock-down? If you don’t, you can claim back your road tax for the period that you’re not using it (remember you still need insurance for theft, but could it be reduced to 3rd party?)
Gym/sports club membership – Make sure you’re not still paying a direct debit for a facility that’s no longer even open.
Home Entertainment – With limited options during lockdown, many people will resort to watching a lot of TV/movies. Sky is one of the more expensive choices with a lot of people paying in excess of £40/month. There are plenty of free/cheaper websites that you can stream programmes and films from and even Netflix and amazon are considerably cheaper.
Credit Cards – As my blog often mentions, if you’re not paying off your debt in full every month you should not be using a credit card. But if you do have on going debt speak to the company – the government are currently putting pressure on them to allow payment holidays.
Utilities – We still need gas and electricity, but do you need the heating on at the moment? Also, if you have a homecare agreement with British Gas or similar, they are only attending emergencies at the moment. Can this be put on hold for this period?
These are just the obvious ones. The key is to stay on top of your spending - be able to account for every penny, and communicate at an early stage with anyone that you owe a debt to. Nobody knows how long this is going to go on for. Don’t wait until you run into a liquidity problem before you try and do something about it or speak to someone - by then it’s too late.
So, going back to my initial statement, the markets are in freefall, what should I do?
This is for people concerned that their investments, ISA's or pensions have dropped considerably in value.
The simple answer is DO NOTHING.
Simple to say but sometimes difficult to do in practice.
In situations like this many people will lose their nerve and sell their position on this market fall. These same investors will then miss the bottom of the market, watch it rally, and try to get back into the market most likely at a higher level than they got out. Once you're out of the market you're far more likely to miss the best rally days than get your timing right and catch the bottom.
After nearly 25 years working as a trader and broker in some of the most volatile markets in history, I had many occasions where I would be sat on losing positions.
Day after day it plays tricks on your mind, seeping into your soul, until eventually you want to cut your position just to make yourself feel better. Psychologists would refer to this as cognitive bias - the tendency to make decisions or take action in an illogical way when under pressure.
But remember: If you didn't sell the market when it was at all time highs a few months ago, why would you sell it now at its lows?
Sometimes you're almost better off not watching. Stop checking what your pension is valued at each day and just tune out for a while. After all you don't check what your house or car is worth every day. Have confidence that by doing nothing you are in actual fact, doing something.
HAVE CONFIDENCE THAT BY DOING NOTHING, YOU ARE DOING SOMETHING
Doing nothing can be particularly difficult because every man and his dog will have an opinion (including me!). You'll hear that 'this time it's different'. 'We've never experienced anything like Coronavirus before.' Which could all be true ... possibly.
But I heard the same arguments for the internet boom in the late Nineties and subsequent crash and credit crunch in 2007. At the time, both were so-called unprecedented situations. Yes - there is a chance that this time it's different, but history tells us that in most instances when it feels catastrophic the markets have normally recovered within a few years. The key point is nobody really knows, so you are playing a balance of probabilities. Listen and read as many different view points as you can, and then make your own decision. I find decisions, right or wrong, are much easier to live with if they're your own rather than blindly following an 'expert'. Particularly when unprecedented situations dictate that there are no experts.
Always be aware that the markets are driven by fear and greed and because of that you get a herd mentality. At the moment fear rules, so investors are taking their money out of the market and leaving in droves. But this can turn very quickly.
As far as I can see the only valid reason to sell at the moment, if you still have skin in the game, is because you think Corona virus and the knock on adverse effects to world economies are going to get a whole lot worse. A fair enough point and who's to say you're not right?
But this is a big call and once you've taken your money out, where do you put it? After all, you've made a decision based on long-term global recession with almost every asset class devaluing. Obviously there's a lot to be said for holding cash right now. But my point is that unless you strongly feel that this is going to happen - if there is any uncertainty - you're better off just holding your position.
Indeed, if you're in the very fortunate position of currently having funds to invest, I would suggest this might be a good time to be putting money in to the markets. But I would add a note of caution that nobody knows how long this is going to go on for, or how it is going to end. Therefore unless you have significant amount of spare capital (lucky you) you are far better to sit on your hands and do nothing. If it's a choice between staying liquid and tying your money up investing for the future, at this moment in time I would say cash is king. In years to come, you may well look back on this as a missed buying opportunity, but for most people, just surviving the next few months is the main priority.
Strange times indeed. Has there ever been a generation before that has been told to save lives and their money, by staying at home and doing nothing! It's a slobs paradise!
Please don't take me too literally - never has it felt more important to have a strong bill of health both financially and physically to survive this period of time. Hopefully going forward, more people will now truly understand the importance of looking after their own personal finances and physical well-being. As we’re now all finding out, when the proverbial brown stuff hits the fan, to a certain extent - you’re on your own.
The Escape Plan has always been about investing in ourselves for our present and our future. With the four pillars being:
Saving and investing for the future
Living within our means and only spending what we’ve earned
Putting away rainy day savings for an unforeseen event
Keeping ourselves fit and healthy
For a lot of people the importance of these four rather boring statements, has been lost in an era of consumerism, credit and instant gratification. For many, the coronavirus pandemic will have come as a very harsh wake up call to take personal responsibility to look after your own finances, health and well being. Unfortunately, for many people the penny will have dropped, but now too late to do anything about it. Hopefully, going forward we will all come out the other side knowing that yes, there are some things that you cannot prepare for, but these are out of our control and should not concern us too much. If we all do whatever we can within our power to look after our own personal health and finances it gives us the best chance of survival when the unforeseen happens.
It will be interesting to see how history recalls this moment in time. I suspect for the majority, it will be remembered as some of the worst times, but also hopefully, as some of the best. In our lifetimes it is very unlikely that we will again get to spend so much quality time with our immediate families as now. Having time together and enjoy just living in the moment, rather than hurtling through life and having no time for what we now know really are the important things. How great would it be for a positive to come from such a negative situation?
However, history also tells us that us humans can have very short memories …
NB I just want to say a huge thank you to all NHS staff and key workers doing such a fantastic job out there. Incredible professionalism in the toughest of situations. What you and many people with underlying health issues are facing, cannot in any way be prepared for.