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By Iniel van Zyl*
The Covid-19 pandemic came out of nowhere. No one could have predicted it, and no one could have been prepared for the aftermath it has left in its wake. In March 2020 governments around the world imposed harsh lockdowns that resulted in unexpected shock waves wreaking havoc on markets worldwide. The market volatility index (VIX) spiked to one of its highest levels in over 20 years. By 23 March 2020, the S&P 500 index had lost 34% of its value to a low of 2 237.40. The Nasdaq and other indices were all hit a similar blow.
The graph below reflects the peak of the Covid-19 breakout in March 2020:
Thankfully, the sharp spike eventually rebounded, and stock markets started their recovery. Even though the markets dropped suddenly, they recovered a lot faster than investor sentiment. Investors all over the world let their emotions get the better of them by panicking and selling or switching investments when they were at their lowest. Unfortunately, this knee-jerk reaction only served to lock in those losses. Amid all the confusion, uncertainty and fear, valuable investment lessons have been learnt.
Do not try to time the markets
There is no formula that can accurately predict what the markets are going to do. To generate wealth, you need to invest in equities over a long period of time. Equities may be risky over the short term because they are volatile by nature, but they are the best performing asset class over the long term. Your investment also needs to grow faster than inflation so that your capital does not lose value over time. As you can see from the graph below, over a short period of time the markets drop and recover regularly. However, if you look at the overall picture, the graphs are on an upward trajectory. It is safe to say that to grow your investments successfully, you should rather aim for time in the markets and completely avoid timing of the markets.
Diversification is key
In simple terms: do not put all your eggs into one basket. Investment managers blend different asset types and investment vehicles in one investment portfolio so that when one investment is down, the other one is up, and vice versa. This helps to balance your investment and safeguard it from major shocks. You can further diversify your investment by investing locally and offshore.
Embrace volatility
It is a fact: no long-term wealth has ever been created without a good dose of volatility. Being fearful of the short-term ups and downs deprives you of participating in the growth potential of equities. It does not always seem logical when you are in the midst of a market drop to do nothing. But that is exactly what you need to do. Block off the noise and keep your eyes on your long-term goal. If you really do feel nervous and unsettled, speak to your financial planner before you make any rash decisions. The graph that follows focuses on the current tension between Russia and Ukraine. You can see how the S&P 500 performed during times of geopolitical risk. You can also see how long it took for the index to recover after specific events. This highlights the fact that you should always embrace volatility and stay invested for the long haul to reap the rewards. Every storm will eventually pass – even Covid-19.
Hoarding cash is not in your best interests
If you are only investing in cash, you may be exposing your investments to more risk over the long term than if they were invested in equities as well. If your investment does not outperform inflation, it will be eroded over time. In other words, in a low-interest high-inflation environment, your investment will head for near zero real returns. The fact of the matter is that equities are still the best asset class to invest in if you want to beat high levels of inflation over the long term. The graph below illustrates the muted growth of cash versus the growth of equities (All Share Index) over an 18-year period:
Remain disciplined and do not procrastinate
Now is the time to get all your financial matters in order. There is, as mentioned previously, value in finding a qualified financial planner to partner with you throughout your life’s journey. Your situation is unique – there’s no one-size-fits-all approach to dealing with your finances, saving for specific goals, or even getting out of a debt trap. Be committed to your financial future. Be responsible with your money and remember – every minute in the market counts.
Do not underestimate the importance of a valid will
Getting your finances in order also means having an up-to-date and valid will that will make sure your family is not left stranded if tragedy strikes. Keep all your paperwork in one place. Let your loved ones have copies of your important paperwork, and make sure you keep all your paperwork up to date. Think about your family in every eventuality and prepare for the worst. So many families lost more than one family member in a short period of time due to Covid. This left numerous families with not only aching hearts but a terrible financial burden to carry during such arduous times.
Covid-19 was not the first pandemic, and it most certainly will not be the last. The future is uncertain for everyone. One thing we do know for sure is that one day we will no longer be able to work. We need to have a financial plan so that we can look after our families and ourselves when we are no longer receiving a salary. The bottom line is that the money that you save for retirement is a long-term investment. The sooner you start formulating your financial plan, the easier it will be to achieve your financial goals. Covid-19 may have brought with it fear and chaos, but there is a silver lining – it has taught us to prepare our finances for an uncertain future, to be responsible and disciplined, and to keep our emotions out of our investments.
- Iniel van Zyl is an Admitted Attorney and financial advisor at Brenthurst Wealth Fourways. [email protected]
Read also:
- Your money in the time of Covid-19
- Your money in the time of Covid-19 – Part 2
- Retiring in the time of Covid-19
