Wed 24 June 2020 - Paramount Financial Solutions
How NOT to handle your finances during COVID-19 downturn
A client came to me midway through this COVID-19 crisis with a question about her portfolio.
“Why haven’t you contacted me to suggest selling my shares and moving to cash? Then I can wait until COVID is over, and then buy back in.”
This client heard this idea from her work colleagues. Water cooler financial planning at its best.
This approach would be problematic on a number of levels, let’s discuss.
No 1 - Selling after a downturn turns a paper loss into a real loss
After the drop has already happened, the worst thing you can do is sell your shares and convert to cash, turning a paper loss into a real one.
The instant you cash out, you’ve locked in that loss.
No 2 - Now that you're out, when do you 'buy back in'?
Our markets on Friday and Monday last week dropped massively. If you’d have acted after Friday’s drop and sold on Monday, you would have taken a large hit, and missed out on the subsequent rise that has now passed the original point from which it fell.
Recent data from JP Morgan shows that if you missed out on the 10 best trading days during the last 20 years, your returns would be cut in half.
See below table showing returns on an initial investment of $10,000. Instead of a $30,000 value, that investment is now under $15,000.
No 3 - Downturns should be priced into your portfolio
When a (reputable) financial advisor constructs a client’s portfolio, periods of negative sharemarket return are priced into your portfolio. This is because they’re a given. We know they happen and we know they happen with regularity, and so we adjust for this.
What that means, is that if your advisor has constructed your portfolio appropriately to suit your needs, then the appropriate course of action during periods like this, is to do nothing.
The only time you should be making large scale changes to your portfolio is if your situation changes, not because of change in the market. For example, you’ve decided to retire; you’ve received an inheritance, you’ve been made redundant etc
So remember, a knee-jerk portfolio reaction based on a market downturn or what you heard at the water cooler is usually a fast way to undermine a solid, long term financial strategy.
Stay the course!
Wayne Leggett CFP JP
Managing Director / Client Advisor