Review Your Financial Plan

The world has been in a state of upheaval since the outbreak of the novel coronavirus, causing unprecedented market volatility and panic-buying among consumers. Despite our intelligence and past learnings, it is challenging to maintain composure and make rational decisions during such a crisis. Here are six financial planning essentials to guide your decisions on investments through this period.

Stay Calm and Hang on to Investments

When stock markets fall, it is natural to want to sell your shares and invest in less risky assets, such as cash and bonds, to avoid further loss. To do this, however, is to lock in a loss forever. If your share portfolio falls by 20% – a normal occurrence in the course of investment cycles – and you sell, the loss becomes permanent, as opposed to a ‘paper loss’.

Another critical point is that if your investment drops in value and you sell, you need to achieve a higher return to get back to the initial value. For example, if your investment drops from R1 million to R800 000 and you sell, you must achieve a 25% return to get back to your original value of R1m.

The situation we are in now is a similar black swan event to the market crash that followed the 9/11 terrorist attacks in 2001 – it might even be worse. Still, the tide will turn. Nobody knows when, even the smartest analysts, but if you sell out of the market, you will miss out when the bull starts to run again. When it does, it is unpredictable and fast, and you cannot afford to be disinvested during the best-performing days.

Protect your Emergency Funds

This is crucial. Do not dip into your emergency funds to stockpile groceries. If you stockpile, you are putting others at risk of going without, and yourself at risk of not having funds for your own emergencies. Emergency funds should be reserved for the loss of income because of redundancy and potential medical expenses. Similarly, do not stockpile using credit. You may be given some grace on the interest repayments, but the principal debt follows you.

Check your Insurance

Many of us avoid reading our insurance policies. We are human, naturally optimistic, and we believe that things will not ever go wrong. This is the time to knuckle down and get to grips with the fine print. You need to know what expenses your medical scheme will cover if you become unwell. That said, most medical schemes will not be able to increase your cover now. You need to reassess and prioritise increased medical coverage at the end of the year when you can make a change.

It is also important to check your life cover policy. Make sure your beneficiary nominations are appropriate and that your family will be protected in the event of your passing.

If you have an income-continuation benefit on your policy, it is important to find out if it will pay out if you fall ill and you’re unable to work – a real threat to many. You also need to be aware that income continuation does not pay out if you are made redundant.

Update your Last Will and Testament

It’s  a good time to check your last will, or to write a will if you haven’t yet done so. A last will are one of the few documents that is required in writing. If you do not have a will and you pass away, you will die ‘intestate’, which means that the state will prescribe the way your assets will be distributed to your family. This might not be in accordance with your wishes.

Writing a will also prompts you to consider critical decisions, such as who to nominate as guardians of your children. Your will can also include an instruction for the creation of a special trust to manage funds for your children – and who the trustees should be. If you do not do this, any money set aside for your children will go to the government-run Guardian’s Fund, and you will have no say as to how that money is invested.

Find Reasons to be Hopeful

This is all pretty heavy stuff, but there are reasons to feel hopeful, or at least a little less anxious about the situation. Families and friends who have not spoken in years are reconnecting online; people in Italy have been singing patriotic songs from their balconies, cities are finally showing appreciation for overworked and underpaid healthcare workers, and pollution levels all over the world have plummeted.

Hold off Retirement if you Can

It is a bitter pill to swallow but holding off on retirement could be the smartest route to ensure your future savings will sustain you. Now is the time to avoid locking in any investment losses. This may mean delaying retirement or finding other sources of income, so you do not have to dip into retirement savings.

If you are an investor and would like to know what South African experts are saying about investments during and post Covid-19, click here to watch a video-based interview with Investment experts presented by Money Web.