Years of steady growth on the stock markets came to an abrupt halt recently as the world grapples with the fallout of COVID-19.
A robust economy in 2019 suddenly feels shaky in 2020 and there is talk of recession. Nobody knows what’s around the corner, but if you’re already feeling unnerved, any news seems like bad news.
Anxious times can lead to uncertainty over your money, second-guessing your future plans and wondering where you’re going to be down the line. This could be when the ‘what ifs’ arrive: What if you can’t retire when you want to? What if the economy tanks and your savings cave in? What if you lose your job or get sick, and you are forced to sell your home? What if you run out of savings at 85?
If you’ve got a bad case of the ‘what ifs’ that’s understandable. But it may also be counterproductive. Making a rash decision in the emotion of seeing a portion of your recent gains disappear may lead you to a course of action you could come to regret. Before you take action, here are some points you may want to consider:
Create a plan for all seasons
Tannis Dawson suggests that you shouldn’t let the ‘what ifs’ drive your action. The High Net Worth Planner with TD Wealth believes that trying to run away from problems and fleeing investments on a whim can lead to even greater problems. While no one has a crystal ball, she helps build wealth strategies that aim to protect against bad times as far as possible.
Dawson explains that while a crashing stock market and downturns in the economy may be unwelcome and can panic those who have never experienced anything like it before, cashing out during volatile times may cause you to miss a market recovery. Stocks and mutual funds don’t grow in straight predictable patterns. If you review the major market indexes after the pullback in 2001 and 2008, the market eventually recovered. In the same way Canadians can be sure there will be a nasty snowstorm every winter, no one can truly predict what day it will come nor how much shovelling we’ll be doing. Same for the stock market. There will always be a downturn, sometimes severe, but no one knows the date. Yet the market rebound that is anticipated to follow may push it to new heights.
A good plan … offers perspective
If you have been used to steady growth in your investment plans for a decade, losing a portion over two months can be plainly shocking. But Dawson says, depending on each person’s circumstances, this may not be the best move to make. For example, if you have 30 per cent of your portfolio invested in equities, you may feel highly motivated by a sharp loss to sell and transfer the funds into seemingly safer type of investments, like cash or GICs.
But Dawson says that kind of move could make the problem worse because, while someone may have suffered a loss on paper, selling can crystallize that loss thereby eliminating an opportunity for the investment to rebound. Moreover, once a growth cycle starts again, leaving money in cash means that an investor can’t take advantage of the market recovery.
And she points out how people can put minor turbulence into perspective.
She says, if people are years away from retirement, conventional wisdom says, yes, the market has gone down but you likely do not need access to those retirement savings right now. Time can help investments rebound from their lows before most investors need the money.
And for people who are retired, if they have a good investment plan, they usually have two to three years’ worth of living expenses in cash or low-risk investments, which will likely not be impacted by a market downturn. Therefore, any growth investments can have time to recover.
Perspective is important, she says, because people often fail to recall the times when they were enjoying above-average growth, thinking any recent good times were the norm. She reminds people what should be considered in making an investment plan in the first place: a plan with a personalized standpoint, one that needs to evolve as people do and one that is based on reality, not rose-coloured glasses.
Plan realistically and change the plan when necessary
A plan is built on a foundation of precise data on what you have and where you want to go with it, says Dawson. While we might all love to buy an island in the South Sea when we retire, simply wishing for it won’t get us there. However, exact details on financial obligations, cash-flow, savings, and aspirations for your money can allow a realistic plan to be built. It may not let you buy an island, but it could determine if you can visit and how the nice the hotel will be.
As an example, Dawson points to one of the greatest disparities people often have in their plans: their spending estimations in retirement. She says many clients believe they will be able to live on 75 per cent of their previous lifestyle costs, or even less. In reality, many people spend the same amount. The reason? Most newly-retired people have more time and enthusiasm for doing things they never had time to do when they were working (like enjoying a luxurious European vacation), which can eat into their savings even if they are spending less day to day. With this in mind, Dawson urges people to be realistic with their future spending, and all their forecasting estimates, in order to help make a more accurate retirement plan.
Few of us go through life without changing our priorities as life progresses or as events like starting a family bring their own urgency to how we run our lives. Both positive and negative changes must be reflected in your investment plan since how much you can ultimately save, the time horizon for your savings and what you want to use the funds for must reflect your current, not previous, situation.
“People never know what life event is going to hit them,” Dawson says.
It all comes down to trusting the plan
Dawson says that while news from the world or financial markets may be unsettling, she tells people to consider their long-term plan, which may be shielded from the short-term volatility of the markets.
Overall, bear in mind that generations before us faced economic turmoil, political stresses and international conflicts, and so may generations after us. We, along with our investment plans may get rattled, but in the end we may need to re-adjust and reset.
“While the short-term results may be disappointing, the long-term view may show that recent history is just a temporary obstacle on the road in seeking to achieve their goals,” says Dawson. “Don’t make rash decisions — it’s often why you made a long-term plan in the first place.”