What financial actions should you take in response to coronavirus?

coroniavirus financial decisions

Given many people are worried about the unknown consequences of the Coronavirus, I thought it was timely for me to share my thoughts and advice. Like in all ‘crises’, it is important to not let emotion or fear drive your responses. ‘A steady hand on the tiller’ is the best approach when navigating any storm.

I acknowledge that the Coronavirus may have caused significant emotional and health distress to people around the world. I fully empathise and understand this situation and do not seek to downplay its impact. But it is important for me to stipulate that my comments below are only about the financial impacts and considerations, not any health concerns.

We’ve heard it all before! Don’t get sucked in.

Financial markets are closed.
All banks are going bust.
The way we conduct global business has changed forever and will never be the same again.
Property markets will take decades to recover.

Statements during the GFC

I heard all of the above statements during 2008 and 2009 when I was glued to the TV late at night throughout the GFC. They are all alarmist predictions and have all been proven to be wrong.

The human race (and economy) is incredibly resilient and innovative. We have faced many challenges and prevailed. This will be no different. In respect to the financial impact on the vast majority of people in the long run, just like with the GFC, I suspect it won’t be that significant.

Once the coronavirus risk passes, I’m sure Australian’s will start spending again to get the economy back to its normal level. I anticipate that our spending decisions will be directed towards the most effected industries such as hospitality and tourism, with the same community mindedness that was evident during the recent bushfires.

Our lives are filled with predictions and usually most extreme ones get the most airtime. Try not to get sucked in. The best approach is to carefully avoid the mainstream media. Worrying has never made any problem better.

Short term thinking creates anxiety

When it comes to money and investing, short term thinking has always created anxiety. This is even more true when markets are volatile. Short term thinking does not serve you well. It promotes you to either be too greedy (when markets are high) or too fearful (when markets are low). 

Instead, a far superior and more comfortable approach is to play the long game. Consider what actions you can take today so that you will be better off in 5, 10 and 15 years. That puts things in perspective and helps you avoid many of the common financial mistakes that people make. And realise that sometimes the most intelligent thing to do is nothing.

The impact of coronavirus on the economy and share markets is temporary, not permanent. Whether it takes 6 months, 1 year or up to 2 years to recover, only time will tell. However, history tells us that its impact will not impact on investment returns over the long run. Your decisions and actions will.

Supermarkets are a perfect reflection of share market

A walk down the aisle of your local supermarket is a sobering indication of the level of hysteria impacting the Australian and international share markets. As I write this blog, the Australian market has fallen 27% since 21 February 2020 and international and US markets have fallen by circa 20%.

But that doesn’t really tell the full story because it’s the level of volatility that has been causing the most newspaper headlines. The Australian volatility index (A-VIX) has ranged between 10% and 20% over the past decade. This week it has peaked at 55%, which is similar levels to the GFC.

Don’t look at your super balance

The best thing to do is not look at your super balance. The balance of your super is completely irrelevant assuming you don’t plan to retire in the next few months. If you weren’t checking your super balance regularly when markets were booming, why start now?

Superannuation investors cannot control markets. No one can. As a superannuation investor, you can control three things (1) the type of fund you use (2) the investment option and methodology and (3) the fees you pay. Assuming you have optimised each of these three decisions for the long run, then all you need to do is close your eyes and know that it will work out.

Looking at your balance regularly only create anxiety. Worrying about your balance won’t make it increase.

The importance of having a cash buffer

I typically like my clients to have cash savings equal to at least 6 to 12 months of living expenses, but often more depending on their financial position.

Life has a habit of throwing curveballs at us. Therefore, it is important to ensure that you have adequate financial buffers in place to ride out any temporary changes in income and expenses. Similarly, it is also important to have appropriate personal risk protection insurances in place too.

Hopefully coronavirus won’t have any impact on your cash flow. However, my suggestion it to use this situation as a learning experience. Unpredictable events can occur and if you don’t have the right financial strategies in place to mitigate these risks, they can cause irreparable financial consequences.

What if your super or investments have fallen by more than the market?

I was looking at new client’s portfolio that was managed by a reputable international stockbroker over the past 5 years. Some of his holdings have fallen by 50% in value – which is way more than the market. This is the problem with direct share investing – there is too much ‘concentration risk’ which is a drag on portfolio performance (BTW, his portfolio overall hasn’t performed well over the past 5 years and now it’s doing even worse).

If you are in a similar situation you can use this experience as a bit of a wake-up call. If your portfolio has fallen more than the market, then its typically an indication that your investment approach or methodology is flawed. Whilst you might not want to fix that now (i.e. sell investments if we agreed they are undervalued), it’s something that might go onto your list to fix at some time later this year.

What if you plan to sell property this year?

Some of my clients are currently in the process of selling a property, or plan to do so this year, and have asked me if they should change their plans. It is still early days, but so far, the impact of coronavirus is patchy. That is, some higher value properties seem to be impacted more than properties at or below the median value. The heightened general level of uncertainly tends to dissuade people from making large financial decisions, even though it probably shouldn’t, since purchasing a property is a long-term commitment.

That said, in times of high uncertainty, buyers and vendors typically withdraw form the market and transaction volumes fall. The big question is how long the coronavirus issue will restrict people’s usual activities? The answer to that question will inform you about its likely impact on the property market.

If you can list your property without too much cost (e.g. adverting expenses and/or tenant vacancy), then there is no harm trying to sell it, since you will probably be competing with fewer properties. But don’t adjust your price expectation too much, unless you have to. If you don’t get a fair price, pull it off the market and try again in 6 to 12 months.

What if you are planning to buy property?

Of course, if vendors withdraw from the market, then there will be fewer properties for sale and less to chose from. That could make it difficult for you to find the right one.

However, that definitely doesn’t mean you should stop looking. Sometimes other people’s fear works in your favour.

In 2008, I was contemplating purchasing a house in the Melbourne blue-chip suburb of Prahran. They were asking $1.6 million, which was above my budget. On the morning of the auction (which I clearly remember was on 1 October 2008, only two weeks after US investment bank Lehman Brothers collapsed), I was contemplating not even bothering attending the auction. This was a time if high uncertainty, volatility and worry – right in the middle of the GFC. But I did end up attending the auction and I purchased the property for $1.21 million. The property is worth well over $3 million today.

Sometimes that best time to buy property is when everyone else is frightened to do so.

Should you invest more? If so, when?

If you do have some spare cash which you earmarked for investment, now might be a perfect time to begin.

However, I do not recommend you try and “find” some cash (including borrowing it) or completely change your predetermined investment strategy. I would regard that as short-term thinking (or speculation), and that is not advisable.

However, if you are sitting on some cash, the best approach is to invest it in small and regular traches to take advantage of a falling and volatile market. That is exactly what I have been doing with my money over the past few weeks.

You must approach any investment decision with a long-term lens. My advice is to seek diversification (don’t take large sector bets – as we don’t know what the economic impact will be) and skew towards markets with the lowest valuations. Stick to low cost index funds and use various rules-based, value methodologies. Us and evidenced-based approach.

Toilet paper and a major change by the banks

We predict that banks will soon require applicants to disclose how much toilet paper they own in the asset section of the loan application. The banks feel that a reasonable level of stock indicates financial prudence and good planning. But too much stock suggests that the applicant might be completely irrational.

Of course, I’m kidding in respect to the above! In times like these, we all must keep our sense of humour. Despite regular and loud protests by my sons to the contrary, I still think my jokes are funny. 😊 Understand that human behaviour can be completely irrational at times. Markets will rise and fall. It’s not the end of the world. Stay safe and stay calm.