In times of uncertainty, how robust is your financial plan?
By Lorna Tan
February 2020. The coronavirus (COVID-19) outbreak which started in Wuhan, China, has brought back unpleasant memories of the SARS outbreak in 2002, and the MERS outbreak in 2012, both of which had resulted in investor stress, anxiety and fear. Most of their concerns centre around whether their investments can withstand the short-term market fluctuations and volatility, and the duration of the uncertainty.
In Singapore and elsewhere, the authorities have implemented measures to minimise spread of the COVID-19 in their respective countries, and help stem the global spread of the virus. These include putting in place controls on the entry of visitors from mainland China. For example, all new visitors with recent travel history to mainland China within the last 14 days will not be allowed entry into Singapore, or to transit through the country.
As retail investors, we should also have robust measures to safeguard our savings and assets, and that are able to withstand short-term shocks and volatility. Doing so will go a long way in preventing any adverse knee-jerk reactions and impulsive investment decisions. It gives us a peace of mind so we can avoid giving in to unnecessary panic and sleepless nights.
6 tips to withstand the uncertainty
Here are six tips to manage your finances during this period of uncertainty.
#1: Have a sound financial plan
With a proper financial plan in place, we will have a better understanding of our financial resources such as our money flows and where our investments stand in the risk-reward continuum.
A comprehensive financial plan covers the areas of managing credit and loans, budgeting, insurance, investment, retirement and estate planning. When these areas are well covered in a sound financial plan, we have greater clarity on how each financial decision affects another and we can adapt more easily to life changes while keeping our life goals intact.
#2: Ensure you have positive cash flow and emergency funds
The foundation to financial wellbeing is to maintain a positive cashflow which can be invested in suitable instruments to make our money work harder. To do this, it is prudent to set up a realistic budget which indicates your money inflows and outflows.
Having at least three to six months emergency funds in cash helps to ensure that you have enough liquidity to tide you and your dependants over during financially challenging times. Doing so will give you some peace of mind even if you suffer from say temporary setbacks like losing a job or are unable to make a living because you must be quarantined. For those in the gig economy, it is advisable to set aside at least 12 months of emergency funds.
#3: Get insurance cover
Insurance is a means to cushion against financial loss due to specified events. Top on the list is a suitable hospitalisation & surgical insurance plan to cover our hospital bills and selected outpatient visits. Other healthcare-related insurance includes critical illness and income disability cover. There are also insurance plans that are related to growing our savings such as endowment plans and investment-linked insurance plans.
A basic rule for retail investors is not to put all our eggs in one basket. As such, our investment plan should not be reduced to a single stock or a single investment strategy. It is prudent to diversify our assets and ensure a good mix of investments that carry different levels of risks, depending on your risk profile and financial needs.
Do not over-concentrate on single securities and single-country assets. It is wise to seek the guidance of a professional financial adviser for this process and who can also help to do portfolio rebalancing when required.
Once you have your optimal asset allocation in place, you will be able to sleep peacefully even during times of uncertainty because you know that your risk exposure will be taken care of. A sound and diversified portfolio will be able to weather the ups and downs of market uncertainty such as the one we are experiencing due to COVID-19.
#5: Use dollar-cost averaging
Adopting the strategy of dollar-cost averaging helps investors to avoid the pitfalls of timing the market. It involves regularly buying a fixed dollar amount of an investment, regardless of the share price. By doing so, you buy more shares when prices are low and few when prices are high. So over time, you will have a lower average share price.
This helps investors to stay invested even during tough times since they keep getting a lower average price.
#6: Invest for the long-term
We cannot be sure how long the COVID-19 outbreak will last and how it will impact the markets. However, history tells us that financial markets have bounced back time and time again, so we are on firm ground.
Financial experts have said that they do not expect the negative impact on financial markets to be long-lasting and that it is likely to have limited impact on global risk assets and economic fundamentals.
DBS Bank noted in its report that in China, support for China banks comes from the central bank’s flexibility to adjust monetary policy to support its enormous domestic economy and spur consumption. Meanwhile, China banks have consistently strengthened their balance sheet and Tier 1 Capital Adequacy Ratio has risen to historical high of almost 12%.
Conclusion: Focus on what we can control
As investors, let us focus on what we can control: setting up a sound financial plan, having a realistic budget, ensuring adequate protection, proper diversification, and a commitment to a long-term strategy to achieve our life goals
We know that that over the long-term, the markets have managed to function efficiently and profitably. So keep calm and carry on, and keep the end goal in mind.