The reality is, none of us can predict the future—not even experts. It’s equally true that good news is rarely perfectly predicted either.
So, it could be said that the secret to life as an investor is not to predict the future, but to prepare for its ups and downs.
Here’s five financial lessons that are helping people get through the COVID-19 crisis.
1. Keep a long-term perspective when investing
Sharemarkets get disrupted all the time, from the 1987 Stock Market Crash, the bursting of the Tech Bubble in 2000, to the Global Financial Crisis in 2007 and COVID-19 today. Each trigger is different and the recovery time varies too.
But investing with a long-term approach puts time on your side. For instance, when investing in shares, your chance of a negative return gets lower the longer you invest.
The other benefit of long-term investing in growth assets like shares is that it is more likely to pay off.
Analysis from Credit Suisse tells us Australian shares have paid investors an average annual return of 6.7% per year since 1900. That makes us the second best performing sharemarket in the world over 120 years.1
The compounding effect
One of the reasons sharemarket returns can be so high over the long term is that they generate compounding returns. That’s where you earn interest on the interest (or growth on the growth) you’ve accumulated over time.
Fundamentally, it’s like planting a tree. As that tree grows, it gets taller—but it also produces seeds that you plant to grow other trees. Those trees will also grow and produce seeds of their own. With enough time, you could turn one young tree into an entire forest.
Because the benefit of compounding returns are generally most effective over a long timeframe the longer your money has time to grow, the better.
Bottom line: if you can afford to put your money away for a lengthy period, you may maximise your chances of good returns.
2. Spread your investments out
Spreading your investments across many asset classes, countries, industries and even investment managers ensures you’re not putting all your eggs in one basket.
The advantage of this diversification is that when one area of your portfolio is falling – another may be rising. If you have money invested across many areas, changes in their values may balance each other out.
It doesn’t mean you can avoid negative returns altogether, but it helps reduce the impact a fall in one asset class has on your total portfolio.
3. Set aside a savings fund for emergencies
A savings fund for emergencies provides a financial safety net to draw on when you really need it. Nobody could predict that a pandemic would shut every pub in Sydney for months. But a prudent bar manager would have had some cash in the bank—just in case something did.
And this doesn’t require a lot of cash up front. You can transfer a small amount of your pay into a high interest savings account on a weekly, fortnightly, or monthly basis to build up your rainy-day fund.
Alternatively, you could have the money sitting in a mortgage offset account that provides the ability to draw back on your loan if you get into trouble.
A good rule of thumb is to have three to six months’ worth of savings, but this varies depending on your circumstances. Speaking to a financial adviser may help to clarify.
4. Review your insurance policies
Insurance helps to transfer financial risk from you to someone else, especially during unforeseen events such as the loss of income you could suffer if you become critically sick or injured.
It’s important to ensure you have enough cover, the right types of cover and that your insurance is up to date — your needs as a single student at 20 are vastly different to your needs at 40 with a mortgage, partner and two kids. Make sure to read the policy fine print too as this covers any exclusions you may not be insured for.
Don’t forget, if you’re a member of a super fund, you’ll likely have insurance through your super. Now may be a good time to decide if this is something you want to hold onto or adjust to suit your needs.
5. Seek professional help
Obtaining independent advice from a financial adviser can help you design a financial plan to achieve your own lifestyle goals—whatever they are. Please contact us on Phone (08) 6225 5150.
They can also help you put the lessons of COVID-19 into practice. An often under-rated element of advice is that it helps people do common-sense things—like investing long-term, staying calm in a crisis, putting away some cash and insuring your income.
1 Credit Suisse: https://www.livewiremarkets.com/wires/australian-sharemarket-wins-gold
Source : MLC Insights August 2020
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