Managing your money post-crisis

Financial planning and managing your money can be challenging, especially in times of uncertainty. Identifying and understanding your short, medium, and long-term financial planning objectives are the foundations to placing you in a position of relative comfort and security. Ideally, you should retain adequate cash funds to meet your immediate planned expenditure over the next 12 - 24 months and/or any need to cover a shortfall in the income that you require from your saving and investments over a 24 - 36 month period. It is also important to ensure that you retain adequate cash reserves, that are available in the event of a financial emergency. The amounts you need will be dependent upon your own individual circumstances. However, the ongoing falls in interest rates have left savers in a situation where interest rates are now so low, that it is difficult, if not impossible, to achieve an interest rate that will give a real return after inflation. To give your wealth the opportunity to grow at a rate that beats inflation requires an investor to accept and take investment risk. You must therefore be prepared to accept falls and rises in the value of your investment. Returns will not generally be guaranteed and you need to be comfortable with a medium to long term view. The beginnings of the global COVID-19 pandemic resulted in a significant fall in market values, which typically wiped out returns achieved over the previous 12 months. To provide some context on this, the FTSE 100 share index closed on the 2 January 2020 at 7,604. By the end of February, the FTSE 100 had slid back to 6,580 a fall of 1,024 or 13.46%. The FTSE 100 hit the lowest value for the year on the 23 March 2020, when it closed at 4,993, a fall of 1587 or 24.12% from its value at the end of February. Eleven weeks later, at the close of business on 8 June, the FTSE 100 had recovered to 6,464 a fall of 1140 since the beginning of the year – 14.99%. As we now generally invest on a global basis it is important to consider how the US markets fared over the same period. The Dow Jones Industrial Average index closed on the 2 January 2020 at 28,868. However, by the end of February, the same index had slid back to 25,409 a fall of 1,024 or 11.98%. The Dow hit the lowest value for the year on the 23 March 2020, when it closed at 18,591 a fall of 6,818 or 26.83% from its value at the end of February. Eleven weeks later, on 8 June, the Dow Jones had recovered to 27,572 a fall from the beginning of the year of 1296 - 4.49% . Managing investment risk requires diversification across different assets of which there are four primary classes: Cash, Fixed Income, Property and Equity (stocks and shares). COVID-19 has affected global investment markets including the values of most assets that form part of your investment portfolio. Cash and high-quality Fixed Income assets that hold a high proportion of short duration and strong credit quality bonds have experienced limited downward movement in value, but do not generate an above inflation return. They have been a perceived safe haven in the current period of uncertainty for the more Cautious investor who holds this asset as part of their portfolio. Other forms of Fixed income assets feature lower credit quality and longer terms to maturity. They have been successful in generating higher returns, as they are higher risk. In recent events some have endured similar levels of volatility to equities, or stocks and shares. Understanding the components in your portfolio and the investment risk you are really taking is important and financial advice essential to ensure you are matching needs with aspirations. We have seen Markets recover significantly since the early beginnings of the COVID-19 pandemic. This event created uncertainty and a sell off that resulted in market falls over a short period. Those investors that did sell during the period, did not then benefit from the subsequent recovery that took place. Over a 5, 10, 15, or 20+ year investment term, such events form part of history. The Credit Crunch, which started in August 2007, 11 September 2001 downturn and Black Monday, October 1987, all featured notable falls in value which, over time were recovered, with wealth restored and built upon. Once you have identified the amount of cash deposits you need over the short term and are comfortable with your investment strategy, it is important that you remain focused on your disciplined longer-term approach. Try not to be influenced by short term events. It is important to recognise that you cannot time the market. Global markets recovered so quickly earlier this year, that for many of those investors that did sell in March and early April, the opportunity to get back in would have been missed. Diversification across different asset classes in modern portfolios has helped to manage volatility and returns. The markets have recovered to a far greater extent and more quickly than was expected and has been experienced in previous financial crises. This has given many investors an opportunity to review their position, release funds to ensure they retain adequate liquidity and reduce investment risk if appropriate. If you are uncomfortable with the extent of volatility being experienced, a further review of the investment risk appropriate for you should be undertaken and your investment options discussed with your financial advisor. Michael Seagrove - Director