Episode Details

Without wanting to seem too philosophical, I believe that life offers us lessons, but we must be prepared to look for them. As we are approaching the end of 2020, I thought it would be a good idea to reflect on what Covid has taught us about our financial decisions.

I have been very proud of how my clients have stayed-the-course this year. Only one client insisted on selling down some investments when the pandemic hit. To be fair, there were some extenuating circumstances. Thankfully, we helped many clients invest new monies during the peaks of market volatility. Whilst these investments were made with the sole goal of maximising long-term value, their performance to date has been very rewarding.

I wanted to share some important lessons that I think the Covid experience has offered us (even as a reminder).

Expect markets to crash

Market corrections are not uncommon. They seem to occur every 8 to 12 years. Of course, the cause of these corrections is always different, unique and completely unpredictable. That’s why they cause a lot of volatility, because the market gets spooked by an event it didn’t or couldn’t have anticipated. And that’s why it always feels like “this time is different”.

Whilst every crash feels different, they are all the same. Firstly, the market overreacts, and all investments are punished, almost regardless of quality and outlook. In March, everything fell in value – shares, bonds, gold… everything! But the reality is that a crisis will impact some asset classes to a greater extent.

Secondly, markets tend to rebound much faster than we expect, which is evident in this chart I shared in a blog at the beginning of March.

The lesson is to be ready for times of very high uncertainty. Stay the course. Don’t let these events tempt you to make any rash decisions i.e. selling. If appropriate, be prepared to make additional investments.

In the midst of a crisis, focus on the long term

In times of a crisis, it’s difficult to focus on the long term because it’s hard to visualise how the crisis might play out. However, despite that, there is great value in sticking to the long game.

For example, the world share index has generated good returns over the long run i.e. 10.7% p.a. between 1970 and 2019 to be exact. Investing in an index like this during a crisis might not generate above average returns in one month’s time, or even one years’ time. But because we know that markets always rebound strongly within a 5-year period after a crisis, it is likely it will generate above average returns in the medium term. It is this approach that serves investors well.

And this is the approach I adopted when investing clients’ monies during March, April and May (and anytime really). I invested in a way that aimed to maximise medium to long term returns. I was not focused on trying to generate short term profits. However, as it turns out, the result in the short term have been fantastic.

The lesson is that focusing on the long run helps people make investment decisions during times of (very) high uncertainty. In fact, it’s the only option, as adopting a short-term outlook tends to be paralysing.

Cash buffers are important

Having plenty of cash savings provides a safety net in case your income unexpectedly falls, or a large expense crops up. I typically advise my clients to hold between 6 and 12 months of living expenses in cash savings. Depending on your financial position and risk appetite, it might be important to hold more.

Whil