Written by Citadel Advisory Partner, Christelle Louw
It was 24 October 1929 and the Brooklyn Daily Eagle newspaper lead with an article headlined: “Wall Street in panic as stocks crash.” Fast forward to 1997 and the Asian financial crisis, which the New York Times covered on 28 October of that year with the following words: “Stocks fall 554 points, off 7%, forcing suspension in trading”. The Financial Times had, on 17 July 1997, run an opinion piece declaring “Asian tigers catch the virus”. A further 23 years into the future and the Financial Times covered the start of the global financial crisis on 16 September 2008 with the lead headline “Day of reckoning on Wall Street”, noting it was the “biggest one-day decline since 9/11”. Two days later the newspaper declared: “Credit panic hits historic levels.”
In 2020, we are reading: “The 2008 financial crisis will be seen as a dry run for COVID-19 cataclysm” (The Guardian, 8 April), “Current panic during the COVID-19 pandemic” (Moneyweb, 6 April), and “British retail sales suffer historic fall as lockdown triggers shopping freeze” (Financial Times, 24 April). But amidst the trepidation there are also statements like: “Then there’s this: 80% of investors see big opportunity in the COVID-19 pandemic” (The Washington Times, 23 April).
While crises of any sort bring untold uncertainty to the markets, fueling fear and uncertainty and opening the door to poor financial decision making, history tells us that there is a tried and tested way to deal with the impact of any financial downturn, be it the result of a market crash, a global pandemic, retrenchment, or even a business failure.
These five steps represent the best and most practical way of dealing with any financial uncertainty.
TAKE CONTROL BY TAKING STOCK
The first crucial step is to take stock of your finances by undertaking a full and detailed lifestyle sustainability assessment. Ideally this should be done in consultation with a professional financial advisor. This personal financial projection will enable you to determine whether you are still on track to reach your financial goals and retirement ambitions, or whether you need to make some adjustments to ensure that your lifestyle remains aligned with your available funds.
Start by putting together a simple household budget in which you honestly and in detail record your monthly expenses, from groceries and entertainment to fuel and wages, medical aid contributions, home maintenance and municipal accounts. Then adjust these expenses to account for inflation to determine whether you will have enough money in your retirement nest-egg. Your assessment should also make specific provision for expenses and liabilities such as paying for your children’s education at various levels, future holidays or the purchase of any vehicles.
Next, add up your income – your salary in addition to any rental income and income from dividends and interest – and weigh this against your expenses to ensure you are not living beyond your means. You should also draw up a comprehensive list of your assets, such as any investments or properties you own.
This combination of assets, liabilities, income and expenses can then be used to provide you with a full financial profile in the form of a graph. On the one axis, your financial advisor can plot your age, and on the other your accumulated capital, and then clearly demonstrate the effect of investment growth and income withdrawal on the capital amount. This graph will form the basis for testing the sustainability of your lifestyle, and it should be reviewed on an ongoing basis to ensure your financial independence and peace of mind.
With your lifestyle sustainability assessment complete, you can then begin to evaluate whether your investment strategy is working for you, or whether you need to make some adjustments to your portfolio in order to reach your goals.
BUILD A CASH MOAT
In troubled times, cash is king. We have certainly found this to be the case amidst the COVID-19 crisis when future income is uncertain, but it is equally true of personal financial calamities such as retrenchment or a business insolvency.
Armed with a complete picture of your financial situation thanks to your lifestyle sustainability assessment, use this information to assess whether you have a financial back-up built into your planning. This cash buffer should enable you to survive for at least three months. You can make use of an emergency fund or even your flexi-bond or banking facility if absolutely necessary.
It is also worth remembering that during good times we tend to develop bad behaviours, so once you have a budget, look for areas of wastage or where you can cut back to free up some spare funds. Given the recent drawdown in markets, cashing in your investments should be seen as an absolute last resort. Not only will you lock in your losses by selling when markets are down, but you could also lose out on the market recovery, as well as the all-important effect of compound interest on your investment growth.
PRESS PAUSE ON BIG EXPENSES
Protect the longevity of your cash moat by avoiding any big expenses. In times of financial uncertainty it is always advisable to put big-ticket items like overseas trips, buying a new car or investing in additional property on hold.
If there is any spare cash in your budget, and if you already have a healthy emergency fund to see you through tough times, rather consider paying down debt or increasing your bond repayments. There are also investment opportunities given the large drawdowns in markets, both locally and on the international stage.
CONSULT A PROFESSIONAL FINANCIAL ADVISOR
One of the key responsibilities of a financial advisor is to guide you through times of uncertainty. It means advising you from the outset on ways in which to prepare your financial defences against future risks and the threat of the unknown. It means working with you to design a tailored financial roadmap or strategy with clear benchmarks for reaching your individual financial goals.
With this framework in place, your financial advisor can better assist you in objectively assessing your progress, and can provide transparent counsel on the performance of your investments and the state of your general financial position. In the face of seemingly insurmountable challenges, a financial advisor can assist you in finding financial solutions to mitigate the impact of setbacks and offer practical advice on re-adjusting your strategy as necessary.
ENSURE YOU ARE WELL-DIVERSIFIED
Having a financial advisor in your corner is also a must when planning how best to diversify your portfolio, be it across asset classes or geographic jurisdictions. Taking money offshore, understanding currency risk and foreign exchange exposure, as well as investing wisely to ensure that your portfolio is able to weather times of financial stress are all the domain of a well-thought-out diversification strategy.
For most people, understandably, the majority of their wealth is concentrated in the country of their residence. This might include a place of residence, rental properties, investments, businesses and financial holdings. But one of the first things your advisor is likely to discuss with you when creating a financial roadmap is how vital it is that you diversify your risk over various asset classes in order to achieve a greater risk-adjusted return. Just like people, some asset classes react differently during times of stress. Some of us crumble, some stay strong, some bounce back faster – the same is true of the characteristics of asset classes from bonds to equities, cash to gold. How you package these together to weather potential market drawdowns is the key to a robust portfolio, as is carefully weighing the extent to which you have invested outside your country of residence and into various global currencies.
There are a range of regulatory concerns that one must adhere to when investing offshore, alongside a delicate balancing act in terms of available funds and offshore investments, but a skilled advisor will guide you through the process and help you to construct a portfolio that considers the value of diversification across all aspects of your wealth management.
At Citadel we know that the future is uncertain, and we work on the ongoing assumption that surprises are inevitable and seemingly around every corner. The secret to successful investing, during both the good times and the bad, is preparation, pragmatism and knowing where to turn for advice. Uncertain times stir up fears and anxieties, and all those dramatic news headlines that throw us off course, but with a solid plan, clear goals and effective execution you too can ride out the storm.
Written by Citadel Advisory Partner, Christelle Louw