Financial planning priorities in challenging markets

The current uncertainty is likely to remain in place for some months to come and valuations can move sharply on a daily basis, depending on both sentiment and the latest news.

Most investors are in it for the long-term so at times like this it is important to hold your nerve and think about the bigger picture ‘financial plan’.

There is cause for optimism, as there are signs from around the world that coronavirus cases are starting to slow, testing and vaccines are being developed, and some countries have already announced measures to ease lockdown restrictions.

It may take weeks or even months to come out of this current predicament, but if we all take the necessary precautions and follow the guidance the situation will improve in time and global demand for products and services will pick up.

Have a positive mind-set and use this time to focus less on your (paper) losses and more on the opportunity that lower asset values offer.

To sense check your own position we have outlined the top things you should consider doing now:

Start to establish an emergency fund

An emergency fund is essentially money that's been set aside to cover any of life's unexpected events. If you are still working, think about how you would cope if you were made redundant, asked to be furloughed or have to take a cut to your income.

Be prepared for these scenarios and give yourself that peace of mind to ensure you have easy access to cash, considering the most appropriate saving vehicles such as instant access savings account, cash ISA or NS&I Premium Bonds.

Evaluate your current and future spending

Now is a good time to evaluate what truly makes you happy and what spend might be discretionary and what might now be considered frivolous or profligate.

The current lockdown situation means we currently live in a world where we simply can’t do many of the things we enjoy such as eating out, going on holiday, supporting your sports team or going to a concert or the theatre. Think about what you enjoy doing and what you do for the sake of it and, once life returns to normal, use this assessment to guide your future spending.

Take control of your finances

While certain aspects of this crisis are beyond our control at present such as when we return to work, the value of investments, or the spread of the coronavirus, there are aspects where you can retain control. Ask yourself these five questions to help you take control of your finances.

1. How much do you spend – Are all those direct debits necessary and are you getting value for money?
2. How much do you save (and where do you save it)?
3. Do your affairs remain tax-efficient and are you using all available tax allowances?
4. How diversified are your investments?
5. Do you need to reappraise your attitude to investment risk and capacity for loss?
   

Don’t become fixated on valuations

While no-one wants to receive a valuation which shows a fall in excess of -10%, the reality is that, like house prices, the only value that really matters is the one received on the day that you sell the asset. Any value in between is merely an indication of its current worth. Most investors in risk assets have a medium to long-term outlook and a current loss on paper may not result in a loss at all, but instead a profit at a future date.

Don’t let your emotions dictate decisions

One of the key challenges investors face is trying to stay focused on the long-term objective while being bombarded with news about the volatility of the markets and the economic impact of coronavirus.

This bias may affect our ability to make rational investment decisions and we could end up trying to avoid losses at all costs rather than logically considering the alternatives.

One such example is ‘loss aversion’, which is an emotional bias that involves taking action (or failing to take action) to avoid a loss.

Before you take any action, think rationally as many of these biases can be reduced by a robust, objective and disciplined thought process. 

Consider investment opportunities

Many investment managers see the current situation as an opportunity to buy more of their preferred funds and stocks at prices that have been discounted from the start of the year. There are some businesses and sectors that will benefit from the current crisis as their competitor space contracts or they innovate their businesses to improve efficiencies, develop new products or find new markets.

A number of shares and assets have experienced a fall in price by sentiment, simply because they are in a market or sector that has fallen. If selected carefully, certain shares and sectors will represent good value and give rise to attractive buying opportunities.

Don’t sell in haste

If you are concerned and tempted to sell equities or funds, take time to seek a second opinion. You should also consider and check the tax implications of making such a decision and where you subsequently intend to reinvest the proceeds (and the costs and risks of doing so).

Talk to your partner, a friend or, even better, discuss your options with your financial adviser. As financial planners, we are here to act as a sounding board and mentor, and to help you make sensible and fully informed decisions.

Take time to review and update

At times like this we pay closer attention to our finances than we otherwise might. This presents an opportunity to revisit wider financial planning aspects such as:

Many investment managers see the current situation as an opportunity to buy more of their preferred funds and stocks at prices that have been discounted from the start of the year. There are some businesses and sectors that will benefit from the current crisis as their competitor space contracts or they innovate their businesses to improve efficiencies, develop new products or find new markets.

A number of shares and assets have experienced a fall in price by sentiment, simply because they are in a market or sector that has fallen. If selected carefully, certain shares and sectors will represent good value and give rise to attractive buying opportunities.

• ensuring you have sufficient life insurance cover
• updating your Will
• establishing a Lasting Power of Attorney
• reviewing your estate and potential inheritance tax implications.