Since February 2020, government responses to COVID-19 have roiled markets and precipitated a broad economic contraction. Tragically, this has plunged many individuals and families into tough circumstances. We have compassion for all who are facing economic or other hardship. But for those who are fortunate to be in relatively good health and on solid financial footing, this crisis can be an opportunity to consider your long-term goals and take some concrete steps to strengthen your finances and plan for your future.
Whenever there’s a crisis or markets are especially volatile, we recommend you pause for a moment and reconsider your long-term financial goals. Where do you hope to be in 20 or 30 years? What will you need to fund the retirement you are hoping for? If your long-term goals haven’t changed, you probably shouldn’t make big changes to your investment strategy, even if current events have you worried or fearful. Historically, stock markets have generously rewarded patient and disciplined long-term investors, despite all sorts of unpleasant events. Instead of making big strategic changes, consider these three actions to help you remain calm during stressful times and to potentially improve your financial well-being.
1. Calculate your expenses and consider reducing them as needed
You may have read articles or heard friends touting the many benefits of understanding your expenses and having a budget. They’re right, of course, but many of us never quite get around to doing this. A crisis, however, can be a useful catalyst to assess or reassess your financial inflows and outflows.
Don’t worry about tracking everything precisely. Your goal, we believe, should simply be to get a pretty good picture of your monthly expenses and your income. You can consider separating your expenses into two categories: essentials and nice-to-haves. This can help if you ever need to cut your expenses. To record your expenses, you can use a template (you can find loads online) or create your own simple spreadsheet or document.
Once you’ve done this work—and it is unfortunately, a bit of work—you should have a clearer picture of your finances. This can empower your planning. You may discover a monthly shortfall, some expenses you can trim, or the ability to put some money away each month. Many individuals have likely been spending less on travel or eating out since the advent of COVID-19. If possible, consider saving this money, perhaps in your emergency fund (see Action #2) or reducing these expenses permanently. Spending typically involves trade-offs. For instance, by spending less today, you can save more for retirement and invest that money for when you need it later. Understanding how you’re spending money and how your expenses stack up relative to your income often reduces anxiety and can enable more informed long-term decisions.
2. Establish or replenish an emergency fund
As part of a sound long-term investment strategy, we always recommend having a proper emergency fund. This fund should ideally cover three to six months of essential living expenses and be held in a highly liquid form so you can access it quickly if you ever need it. Your emergency fund is a potentially invaluable safeguard should you face an unforeseen crisis, whether a job loss, medical emergency or major home repair. Life is unpredictable and if you don’t have an emergency fund you may need to sell assets at an inopportune time—for example when the market is down significantly. Or you may be forced to take on potentially costly debt. Say you put $5,000 on a credit card carrying an average 19% annual interest rate and made minimum payments of $200 per month, you’d end up paying back a total of $9,985 ($5,000 plus $4,985 in interest) over the next eight years. That’s nearly double the original cost!
Hopefully, you’ll never need to draw on your emergency fund, but just knowing it’s there can provide peace of mind. If you do tap into your emergency fund, remember to replenish it when you can. When interest rates are low, as they are now, you may worry that an emergency fund is not a good investment. After all, if your savings account earns less than 1% interest annually, you’re likely not even keeping pace with the rate of inflation. But, and this is an important but, your emergency fund is not an investment. Rather it is a tool to help you manage risk.
3. Reframe “doing nothing” as an active choice
When markets are in turmoil, it can feel like you’re tumbling along with them. It’s common to feel you need to do something—others may be selling out of the market or making big changes to their portfolios in response to volatility. Getting swept up and acting on your fears, however, could move you further away from your financial goals. Doing nothing may be a better option if you already have a prudent investing plan with an optimal asset allocation and well-diversified portfolio. This may not feel good in the moment, but it can help to mentally reframe your decision to do nothing as itself an action. Think of it as an active decision to continue along a path that will likely pay off if you’re able to remain disciplined over the long run.
Rather than acting on emotion and making big changes to your portfolio, these three concrete tasks—tracking your expenses, building an emergency fund and reframing doing nothing as an active choice—are excellent steps to take when markets or the world itself seem uncertain and scary. They can help you feel in control, improve the state of your finances and they’re a great way to remain focused on your long-term goals.
Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.