A major financial crisis like the one caused by the COVID-19 pandemic can immediately cause panic, but there are ways to ensure you’re in as good a position as possible when you come out on the other side.
“I like to think about it as, ‘expect the worst and hope for the best,’” said David O’Leary, founder and principal at Toronto-based fee-for-service financial planning firm Kind Wealth.
“Just the very fact of having a game plan and taking a concrete step toward those things does a world of good for calming emotions, bring focus and reduce stress.”
And while the COVID-19 financial crisis has been different from any other, there are some key steps people can take to shore up their finances during any downturn.
Managing cash flow
A big worry when the economy takes a turn is around the ability to maintain your lifestyle and cover expenses. A good first step is to take a look at your expenses and see where you can cut back, since things that seemed like “needs” a few months ago will be pretty clear “wants” today, said O’Leary, who launched an initiative to offer free personal finance consultations for anyone struggling with the economic impact of the pandemic.
People should also be looking at all the programs available to substitute lost income, from a slew of government support to reduced credit card interests on some credit cards, credit card charge backs and mortgage payment deferrals.
These are programs you need to apply to and ones that come with costs and taxes down the line, so only apply to them if you really need to, said Rona Birenbaum, founder and certified financial planner at Caring for Clients, a fee-for-service financial-planning firm in Toronto. It’s also important to make sure you file your taxes if you think you’ll be getting a return, especially since the deadline to pay any money owed has been extended to September 1, 2020.
If people are “only spending what they absolutely have to, if they don’t have access to credit, if with all of the things they’ve done they’re still having to spend more than the money that’s coming in, they should look at their TFSA or their RSP,” said Birenbaum. “Do it very carefully and judiciously, but don’t feel as though you’ve let yourself down if you’re pulling money out of your savings.”
Dealing with Debt
Facing an economic downturn can feel particularly daunting if you’re going into it already carrying a large amount of debt.
“It’s a good opportunity for people who have higher interest rate debt, if they haven’t already, to look at opportunities to consolidate that debt at a lower interest rate,” said Jason Heath, managing director at Objective Financial Partners Inc. in Toronto.
“But you have to be very careful about any taking on of debt, deferring payments, extending amortization, because all of this is just kicking the can down the road. Eventually you’ve got to deal with that.”
To O’Leary, how you deal with accumulated debt will depend on the nature of the debt and whom it’s owed to: a bank, a payday lender or a family member.
“If you can avoid having a permanent ding in your credit rating by shuffling around some of your credit to make those payments, there’s value in it – (but) it’s not a long term strategy, because you’re just accumulating more debt.”
Another area that should be monitored is your investments, because a financial crisis allows you to find value in buying opportunities, adjust your asset mix and review your risk tolerance.
“The way to successfully invest is to not be a forced seller at any point in time, and the way to avoid being a forced seller is to have other investments that are not market sensitive that you can draw from, or you can use to actually increase your equity exposure when prices are really, really compelling,” said Birenbaum.
“Looking at the next, say, five years you have to make a reasonable estimate as to what you would be needing to pull out of your account and you just want to make sure that you have at least that much money in high-interest savings, quality bonds, on funds, ETFs or GICs. If you don’t then you should get to that point, incrementally”.
For people who are still able to work and earn similar income to what they were before the financial crisis, the market downturn creates a buying opportunity, “because stocks are on sale,” said Heath.
But investors also need to remember that the situation is volatile and beware of knee jerk reactions.
“Whether stocks are going up or down, you should try to have a similar approach to investing no matter what’s happening in the markets.”
And while a financial crisis can present a chance to upgrade the quality of your holdings, you also want to make sure you’re not getting greedy about what’s for sale and keep your risk tolerance in mind.
“If you already are invested in the markets and you’ve seen your portfolio fall, (and) if the amount that it’s fallen has really freaked you out and you can’t sleep at night … it’s probably a sign that you were too aggressively invested in the first place,” O’Leary added.
“Your portfolio has to be built to weather anything – whether it’s a virus or whether it was some other thing that caused the markets to fall; they have to be structured in a way that if the markets experience something like this you can stomach the losses that you’re seeing in your portfolio.”
If you’re retired and need to pull money out of your portfolio to meet living expenses, O’Leary suggests working off a band. If you estimate you need to withdraw five per cent of the value of your portfolio annually to cover living costs, try to work with a range of between three and seven per cent. That way, if there’s a downturn, you tighten your belt and pull out less when the value of your portfolio is lower, and more when times are good to make up for it.
For younger investors, especially those whose whole investing life spanned the last decade’s seemingly endless bull market, the current downturn will teach them a lot about the kind of investors they really are.
“Now that they’ve gone though an up market and a down market, on balance, they should be in a better position to really understand their risk tolerance for volatility and ensure that going forward their portfolio is structured to reflect that,” Birenbaum said.
“The younger the investor is, the more valuable this investing experience will be for them, because there’s nothing that increases one’s investing wisdom more than a down market.”