Black swan events occur periodically. My job as a wealth manager is to prepare my clients, as much as possible, for the unexpected.
As we get used to the blockade, the task of carrying out many procedures, checking reality and adapting financial plans is an activity that many of us are already undertaking.
Here are seven areas that people should consider, act on or have already concluded.
Cash is king, as my father has always said, although contactless payments have taken precedence in stores. But access to liquid funds is vital at times like these. The fundamental key to financial planning is making sure you have enough liquidity in the short term.
So-called black swan events (think of the dot-com crash, the global financial crisis) have an unpleasant habit of arising. For my clients, the norm is usually to maintain the expenditure in cash between one and three years.
Currently, we have an interesting situation as most people’s spending has been reduced during the pandemic, something that generally does not happen with black swan events.
Make a plan and stick to it
Look at your financial plan. Did you have one If not, now is the time to start. What do you want most financially: early retirement, easy retirement, or wealth transfer? Whatever it is, write it down and then start figuring out how to do it.
If you have a plan, like my clients, stick with it. Of course, amend the plans when circumstances require, but stick to the fundamentals.
Synchronizing the markets is impossible, so don’t try. Invest and maintain if it is the plan and if it is the right thing for you. If you were planning to top up your Isa at £ 20,000 this fiscal year, instead of trying to time the market, just stay on the plan – invest and forget.
Questions about pensions
Pensions are my favorite subject (well, it has kept me in a job for 20 years). See where you have invested your funds. You often checked a few boxes on your first day at a job, and never looked at them again. Have you ever wondered if the risk you are taking is appropriate? Also, look at the charges – what do you need to accomplish each year to cover them?
You may have received a final salary transfer valuation earlier this year or are thinking of obtaining one. As always, watch this very carefully. Yes, it will move money to the market to a lower level and maybe that transfer rate you received two months ago is now theoretically 20% higher due to market movements. But the actuary who produced this figure did not do it to help him.
They have a duty to protect the scheme and other members. Never let anyone tell you that a final salary transfer is an “obvious” one. It’s a “massive no-brainer,” which is evident if you’ve ever been to a dinner with an actuary. In fact, you just need to ask those who transferred in the past 18 months to see how obvious it really is.
Forgive me for mentioning this, but even before the pandemic, financial advisers have urged their clients to seek protection. What would happen to your or your family’s finances in case of illness or death? Having a plan is important, but protecting it is vital. Therefore, check your current insurance coverage (you may have policies through your workplace, as well as personal coverage).
See if you have enough income replacement, critical illness and life coverage. There is little you can do to change this in the current situation, but be sure to consult it when possible to remedy it.
Tackle the “life manager”
Lockdown is the perfect time to tackle things we never found time for. Have you made a will and is it still up to date? The same applies to power of attorney agreements. Every pension you have will have an expression of a desire for (death pension) – again, usually something that completes the first day of a new job and then gets forgotten.
In general, what state are your finances in? If your paperwork is in disarray, imagine how bad it would be for your family to solve if you are no longer around. The life manager is a chore, but the manager after a death is a huge burden in a time of emotional distress.
I recently had a Zoom call (a phrase that wouldn’t have meant anything two months ago) with my friend Caroline. In place of the dividend checks you generally receive, there have been letters reporting that your dividends have been suspended.
For those who get a “natural income” from their investments, these are particularly difficult times. Basically you have four options.
First, you can spend your capital (the “natural producer” will find this sacrilege). You can look for other options that are still paying a dividend or are high-yielding, but you must ask yourself how risky they are and how long the income will last (and if dividends are reduced, the share price will drop, compounding the error).
Alternatively, switch to a growth strategy (don’t forget your capital gains tax allowance to do this in the most efficient way possible) or look for full return – let a fund make investment decisions on growth or returns. income and spend it as it comes.
For many, the fourth and final option to “sit” will make more sense. In any case, your income needs this year may have decreased due to a lack of things to spend your money on, such as vacation abroad. Based on what you’re spending now, what are your monthly income needs? For Caroline, the difference was a pair of shoes that stay on the shelf somewhere, so it’s not too bad.
To protect your income strategy in the future, make sure you have diversified investments and, most importantly, diversify your strategies. Use different strategies in different tax wrappers within an overall plan.
Prepare to be flexible
In conclusion, don’t just accept the weaknesses of your plan – accept them and think of ways to make up for them. Then you will be in a much stronger position to weather the next crisis (whatever it is).
The most important aspect of financial plans is that they have to be adaptable. Sometimes he puts money into the plan, sometimes he takes money out (that’s why he doesn’t put all his money in pensions).
When you withdraw the money, you need to think about the implications: taking out £ 20,000 in cash today means £ 20,000 less invested, which affects returns on investment for many years to come. In turn, this could kick out your plans to retire at 60.
Plans are made for review, but the crucial thing is to make sure you save enough cash when the times are good, so you don’t have to raise cash at the worst possible time when the times are bad.
Michael Martin is a private client manager with Seven Investment Management (7IM). The opinions expressed are personal. Twitter: @ 7IM_MichaelM