COVID-19 - an opportunity to better understand our finances
In the interests of helping maintain sanity in your bubble, I had initially planned to make this month’s column a 'COVID-19 free Zone'. After the Christchurch earthquakes, turning off the endless TV news was sometimes the healthy option. I think there is a good argument for applying the same approach to the 'wall to wall' COVID-19 coverage. However, a column dedicated to financial management could be accused of negligence by not addressing the current matters at hand.
When we face events like this, for which we have no precedent within our lives, it is very easy to feel overwhelmed. The universe of possible outcomes seems so vast. At times like this we need to remember to base our decision making on fact not fiction and keep our emotions in check. I don’t want to callously disregard the human toll of these events, but let’s start with a few facts:
1. We know what has caused this event and it seems highly likely that we will be able to develop an effective vaccine. Whether it will take nine months or two years is unknown, but the key fact is that it will have an end point.
2. Even without a vaccine, the 1918 Spanish Flu pandemic burnt itself out within a 2-year period1. This further supports an end point, even if a vaccine is not developed.
3. During the period of the Spanish Flu, the United States share market increased by an average of 25% per year. The experience from previous pandemics is that they do create market volatility, but they don’t derail investment markets over the medium to long term. They create buying opportunities.
4. In the United Sates alone the annual death rates from drowning is 320,000, heart disease 647,000 and exposure to lead 412,000.2 It is hard not to be surprised by these figures, but the reality is that these death rates are normal, we just don’t have them reported to us on a daily basis.
5. Some economic forecasters are suggesting that New Zealand’s unemployment rate may peak at 15%. In other words, 85% of workers will continue to be employed. Yes, the contribution that tourism makes to our GDP (around 6%) will take a significant hit and some time to recover. But with more than 75% of China3 already resuming normal economic activity there is already some positive news for our export economy.
6. Comparisons are being made with the events of the 1930s Great Depression where the economic recovery took 10 years. In the Great Depression the governmental response was precisely the opposite of what is occurring now. At that time, governments cut spending and provided very limited social security. It was later recognised that these responses worsened conditions and prolonged the recession.
7. With COVID-19, governments and central banks across the world have moved rapidly to implement economic measures to support people, businesses and banking systems. The scale of these support packages is unprecedented. In New Zealand, the initial measures represent 4% of GDP. In the United States, the figure is US$2.2 trillion which is 10% of the United States’ GDP. Even in inflation-adjusted terms, this dwarfs the 1948 Marshall Plan funding that the United States provided to Europe at the end of the Second World War.
So what does this mean for you and your family finances?
For those of you saving through KiwiSaver I suggest that you read Rhodes Donald’s excellent article titled 'KiwiSaver’s big flaw: not enough advice for savers', which appeared in the ODT on Saturday 4th of April.
In that article Rhodes set out clearly:
1. The argument for not reacting to a falling KiwiSaver balance by reducing your risk exposure, unless you have a short-term goal such as needing the capital to purchase your first home.
2. The importance of having a plan which means that the investments you hold are aligned with your life, your needs and your risk profile.
3. Maintaining or, if possible, increasing your regular contributions in this environment to maximise the benefits of 'dollar cost averaging', i.e. buying more assets during a falling market.
For many KiwiSaver investors this is the first significant market correction they have experienced. As a result, it has exposed a lack of understanding about the nature of a diversified portfolio and how KiwiSaver operates. This level of unawareness should not be a surprise as it just reflects the fact that most KiwiSaver members were not advised when they established their accounts.
The need for informed advice has been further highlighted by the response to a free 0800 helpline (0800 698 884 for those that need it) that was launched by one KiwiSaver provider last week. The provider has made available their team of in-house Authorised Financial Advisers (AFAs) and a wider group of independent AFAs to provide generic KiwiSaver advice without any promotion of their KiwiSaver offering. It is interesting to note that roughly 60%4 of inquiries related to the process of applying for access to funds on the grounds of financial hardship.
In the closest thing that you will ever see in my column to brazen self-promotion, I am proud of the fact that this initiative was launched by our company, NZ Funds.
For those of us who are fortunate enough to maintain our employment through this period, or have cash available for investment, COVID-19 may provide a once-in-a-lifetime opportunity to invest when assets are on 'super sale'. But, as always, good advice will be critical.
When we face events like this, for which we have no precedent within our lives, it is very easy to feel overwhelmed. The universe of possible outcomes seems so vast. At times like this we need to remember to base our decision making on fact not fiction and keep our emotions in check. I don’t want to callously disregard the human toll of these events, but let’s start with a few facts:
1. We know what has caused this event and it seems highly likely that we will be able to develop an effective vaccine. Whether it will take nine months or two years is unknown, but the key fact is that it will have an end point.
2. Even without a vaccine, the 1918 Spanish Flu pandemic burnt itself out within a 2-year period1. This further supports an end point, even if a vaccine is not developed.
3. During the period of the Spanish Flu, the United States share market increased by an average of 25% per year. The experience from previous pandemics is that they do create market volatility, but they don’t derail investment markets over the medium to long term. They create buying opportunities.
4. In the United Sates alone the annual death rates from drowning is 320,000, heart disease 647,000 and exposure to lead 412,000.2 It is hard not to be surprised by these figures, but the reality is that these death rates are normal, we just don’t have them reported to us on a daily basis.
5. Some economic forecasters are suggesting that New Zealand’s unemployment rate may peak at 15%. In other words, 85% of workers will continue to be employed. Yes, the contribution that tourism makes to our GDP (around 6%) will take a significant hit and some time to recover. But with more than 75% of China3 already resuming normal economic activity there is already some positive news for our export economy.
6. Comparisons are being made with the events of the 1930s Great Depression where the economic recovery took 10 years. In the Great Depression the governmental response was precisely the opposite of what is occurring now. At that time, governments cut spending and provided very limited social security. It was later recognised that these responses worsened conditions and prolonged the recession.
7. With COVID-19, governments and central banks across the world have moved rapidly to implement economic measures to support people, businesses and banking systems. The scale of these support packages is unprecedented. In New Zealand, the initial measures represent 4% of GDP. In the United States, the figure is US$2.2 trillion which is 10% of the United States’ GDP. Even in inflation-adjusted terms, this dwarfs the 1948 Marshall Plan funding that the United States provided to Europe at the end of the Second World War.
So what does this mean for you and your family finances?
For those of you saving through KiwiSaver I suggest that you read Rhodes Donald’s excellent article titled 'KiwiSaver’s big flaw: not enough advice for savers', which appeared in the ODT on Saturday 4th of April.
In that article Rhodes set out clearly:
1. The argument for not reacting to a falling KiwiSaver balance by reducing your risk exposure, unless you have a short-term goal such as needing the capital to purchase your first home.
2. The importance of having a plan which means that the investments you hold are aligned with your life, your needs and your risk profile.
3. Maintaining or, if possible, increasing your regular contributions in this environment to maximise the benefits of 'dollar cost averaging', i.e. buying more assets during a falling market.
For many KiwiSaver investors this is the first significant market correction they have experienced. As a result, it has exposed a lack of understanding about the nature of a diversified portfolio and how KiwiSaver operates. This level of unawareness should not be a surprise as it just reflects the fact that most KiwiSaver members were not advised when they established their accounts.
The need for informed advice has been further highlighted by the response to a free 0800 helpline (0800 698 884 for those that need it) that was launched by one KiwiSaver provider last week. The provider has made available their team of in-house Authorised Financial Advisers (AFAs) and a wider group of independent AFAs to provide generic KiwiSaver advice without any promotion of their KiwiSaver offering. It is interesting to note that roughly 60%4 of inquiries related to the process of applying for access to funds on the grounds of financial hardship.
In the closest thing that you will ever see in my column to brazen self-promotion, I am proud of the fact that this initiative was launched by our company, NZ Funds.
For those of us who are fortunate enough to maintain our employment through this period, or have cash available for investment, COVID-19 may provide a once-in-a-lifetime opportunity to invest when assets are on 'super sale'. But, as always, good advice will be critical.
1. 'Covid-19 Market Update 4 - 2020 vision', NZ Funds Investment Research, April 2020.
2. Centre for Disease Control, World Health Organisation and various resources, 03 April 2020.
3. 'Approximate workplace resumption rate in China’s provinces', 03 April 2020. Reuters, 17 April 2020.
4. NZ Funds Covid-19 KiwiSaver 0800 Advice call centre, 8 April 2020.
2. Centre for Disease Control, World Health Organisation and various resources, 03 April 2020.
3. 'Approximate workplace resumption rate in China’s provinces', 03 April 2020. Reuters, 17 April 2020.
4. NZ Funds Covid-19 KiwiSaver 0800 Advice call centre, 8 April 2020.
***
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and a Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
***
First published in the Otago Daily Times on 16 March 2020, as ‘Crisis an opportunity to better understand our finances.’
