The economic impacts of the COVID pandemic – roller-coaster stock markets, job losses, struggling businesses – have left many Canadians concerned about their own financial security. The crisis has reinforced the importance, at any age, of having a detailed financial plan to help set long-term goals and realize your dreams.
This five-part series of articles highlights the importance of having a financial plan, and how an advisor can help you be prepared for market corrections, as well as all the big events in your life. In Part 3, we look at the turbulent past several months and why a long-term perspective will help you stay on track to meet your goals whatever life throws at you.
Earlier this year, as world financial markets plummeted in response to the nascent coronavirus crisis, and investment statements showed funds were losing money — on paper anyway — many Canadians wondered what it meant for their nest eggs, how long losses would continue and whether they should cash out some investments.
However, if you had a financial planner you were likely being coached to stay the course through the first half of the year, and with good reason. By mid-summer, the major indexes had pretty much gained back their losses and investments were back in the black. This holds true whether the world is facing a pandemic, in a period of recession or even during major political upsets.
Making a knee-jerk decision to cash out investments is the “single most harmful thing you can do because it can be very difficult to recover losses even if you are only out of the market for one day,” says Tonya Campbell, Regional Vice President, Central Canada Mobile Advice Team at Scotiabank.
Campbell, who has held roles in Retail, Small Business, Commercial, and Wealth at the Bank in the past 24 years, says her experience working directly with the customer has given her a passion for helping fellow Canadians with their financial health. Everyone needs a financial plan, whether basic or complex, so they can make informed decisions about their financial future, she says.
“Financial health is an often-overlooked element to overall health and wellness,” Campbell says.
One of the ways a planner contributes to a customer’s financial health is by providing calm guidance when things seem to be going amok. That can mean providing the right context when making decisions about investments, she says.
Most people, for example, tend to look at the entire balance of their portfolio benchmarked against the last time they looked at it, and that doesn’t show the whole picture. Comparing the balance from April 30, a month into the second quarter of a calendar year, with that of Dec. 31, 2019, likely would have shown a drop of between 5% and 25%, depending on how you are invested, but if you look at the gains for the entire year it tells a different story. “A lot of people, even if they had only been invested a full year earlier, were still up, because the drop that happened between Dec. 31, 2019 and April 30 wasn’t enough to offset the banner year in the market in 2019,” Campbell explains.
Market corrections “are embedded in our history … there is a pattern where every number of years we don't know what's going to happen, but we know something will,” she says, noting the handful of irregularities that have happened since 2000. In the big crashes of this century, it took the markets about 25 years to recover to pre-crisis peak after bottoming out during the Great Depression, and about 4 years after the Great Recession of 2007-08 and a similar amount of time after the dot.com crash in 2000.
Whether or not the current market correction, has run its course remains to be seen, but regardless Campbell says, “if you have a financial planner and a plan, understand corrections are going to happen and that your planner has embedded the likelihood of a correction into the investment choices that were made.”
Here are a few things you can do to set your mind at ease, too.
Re-evaluate your plan once a year to determine whether any adjustments are needed. This is especially important if any of the assumptions that went into your plan have changed, such as job loss, unplanned medical expenses, or any other major impact that would cause you to think differently about your financial future.
If you have not met with your advisor in the past few years, now is the time to do so, especially if you have lost your job due to shutdowns. Loss of income will make a difference in contributions and cash flow needs.
While many people think that means a change to their portfolio, that’s not necessarily true, Campbell says. When income changes, the first place she typically looks is at the client’s discretionary expenses to see if they can be trimmed without having to touch the long-term financial plan and savings.
“In many cases, especially in the mass-affluent and above market, there are discretionary expenses that can go first before even needing to touch the plan, but ultimately that’s up to the client to decide.” Those expenses can include recreational vehicles and vacation properties that require annual spending on maintenance, storage fees, taxes and so on.
“Those become negotiated or thoughtful trade-offs that are made as a result of change in income,” Campbell says.
Investors six to 12 months away from retirement tend to worry more about whether they have time to recover from a prolonged market drop before they need to start withdrawing funds. However, if you have been provided with financial advice leading up to your retirement, a portion of your portfolio will have been de-risked for the short term. That means a portion of your portfolio should be in more liquid, or safer investments — such as high-interest savings accounts and GICs with terms aligned with time of need — that will get you through the next few years.
“Most retirement portfolios are designed to last for decades. Even if this pandemic takes three years for recovery, in theory you probably already have about three years’ worth of de-risked money available,” Campbell says.
The bottom line is that in volatile markets and times of crises, the job of a financial planner is to help the client make rational decisions considering the bigger picture. “If you don't have an advisor, then now more than ever, is the time to get one,” she recommends.
Ready to get started?
Now that you know the basics, you’re all set to meet with a Scotia advisor.
For your personalized financial plan, find an advisor and book a meeting at a branch near you.