Lessons from lockdown | Learnings from COVID-19
As 2020 draws to a close I thought it would be helpful to reflect on the year that was, and what specific financial lessons COVID-19 has taught us. I had hoped to create a clever acronym with the headings, but this proved to be well beyond my literary skills so, true to type, I have resorted to numbers.
1. Family. It is interesting to note that when confronted with an existential threat like COVID-19, our core values tend to be revealed. For many people those prized things were family and relationships. The simple truth is that these things don’t have to cost a lot. For those of us who stayed employed during the lockdown (and that was most of us) we generally saved money. Some of these savings related to reduced commuting costs but much resulted from less frivolous spending.
One question to ask yourself is: have any of these improved spending behaviours been embedded in your ongoing savings habits?
2. Beware of alarmist experts. Conventional wisdom does not always apply in unconventional times. Although there has been some re-remembering occurring of late, I cannot recall one expert who was predicting that domestic property values would dramatically accelerate. The conventional wisdom was that property values would fall somewhere between 5% and 15% when, in reality, we have experienced an average increase of around 20%. In other words, most experts were between 25% to 35% wrong!
3. Financial reserves. Back in May, the Commission for Financial Capacity (CFFC) published a report on the ‘Impact of COVID-19 on Financial Wellbeing’1. Their research showed that during lockdown 34% of households were experiencing financial difficulties, 40% had little financial resilience and just 26% of households appeared to be financially secure. One of the markers of the last group is that they held some emergency funds outside of KiwiSaver and their day-to-day transactional accounts. I do understand that for some households this is not a realistic objective, but what about yours? The question you need to ask yourself is: do I have three months of family consumption reserved somewhere?
4. Gratitude. Your birth in New Zealand was probably an accident. I am not suggesting poor family planning, but just the fact that for many of us we are here because it was the location of our birth. We are lucky to live in a country where we can afford to send everyone home and the state can provide a liveable level of income for an extended period. Yes, this will increase our national debt, but it is still economically viable. I need to remember to be grateful for this fact.
5. Discipline. Hopefully, you were not one of the 50,000 KiwiSaver investors who, in late March, thought that they had developed powers of clairvoyancy and could now predict market movements. They were the ones who switched $1.4 billion from high growth funds (with a high exposure to shares) to more conservative funds with assets predominantly invested in fixed interest. In doing so, they converted what would have been temporary losses into permanent losses.
The lesson here is that you need to have selected your asset allocation in the knowledge that it is right for your circumstances, not just when markets are positive.
6. Brave. For those who were brave and were able to invest further capital during the market lows of late March, the results have been impressive. While some got caught up in the ‘alphabet soup’ discussion (e.g. would the recovery resemble a ‘V’, ‘W’, ‘L’ or a ‘K’) others just got on with it and invested in the belief that they had enough time to benefit from buying undervalued assets regardless of what shape the recovery would take.
For many of us, the financial impacts of COVID-19 have largely passed us by and, in some cases, it has made us better off. However, I must stress that this is not everyone. In their most recent COVID-19 report, the CFFC noted that 11% of New Zealand households were still experiencing severely reduced incomes. Christmas is going to be a difficult time for many of those families. My challenge to you is: if you are one of those lucky households that has been able to maintain your employment and finances, then please consider making a donation to a local food bank or charity. After all, Christmas is the time of giving.
Wishing you all a safe and happy festive season.
1. Family. It is interesting to note that when confronted with an existential threat like COVID-19, our core values tend to be revealed. For many people those prized things were family and relationships. The simple truth is that these things don’t have to cost a lot. For those of us who stayed employed during the lockdown (and that was most of us) we generally saved money. Some of these savings related to reduced commuting costs but much resulted from less frivolous spending.
One question to ask yourself is: have any of these improved spending behaviours been embedded in your ongoing savings habits?
2. Beware of alarmist experts. Conventional wisdom does not always apply in unconventional times. Although there has been some re-remembering occurring of late, I cannot recall one expert who was predicting that domestic property values would dramatically accelerate. The conventional wisdom was that property values would fall somewhere between 5% and 15% when, in reality, we have experienced an average increase of around 20%. In other words, most experts were between 25% to 35% wrong!
3. Financial reserves. Back in May, the Commission for Financial Capacity (CFFC) published a report on the ‘Impact of COVID-19 on Financial Wellbeing’1. Their research showed that during lockdown 34% of households were experiencing financial difficulties, 40% had little financial resilience and just 26% of households appeared to be financially secure. One of the markers of the last group is that they held some emergency funds outside of KiwiSaver and their day-to-day transactional accounts. I do understand that for some households this is not a realistic objective, but what about yours? The question you need to ask yourself is: do I have three months of family consumption reserved somewhere?
4. Gratitude. Your birth in New Zealand was probably an accident. I am not suggesting poor family planning, but just the fact that for many of us we are here because it was the location of our birth. We are lucky to live in a country where we can afford to send everyone home and the state can provide a liveable level of income for an extended period. Yes, this will increase our national debt, but it is still economically viable. I need to remember to be grateful for this fact.
5. Discipline. Hopefully, you were not one of the 50,000 KiwiSaver investors who, in late March, thought that they had developed powers of clairvoyancy and could now predict market movements. They were the ones who switched $1.4 billion from high growth funds (with a high exposure to shares) to more conservative funds with assets predominantly invested in fixed interest. In doing so, they converted what would have been temporary losses into permanent losses.
The lesson here is that you need to have selected your asset allocation in the knowledge that it is right for your circumstances, not just when markets are positive.
6. Brave. For those who were brave and were able to invest further capital during the market lows of late March, the results have been impressive. While some got caught up in the ‘alphabet soup’ discussion (e.g. would the recovery resemble a ‘V’, ‘W’, ‘L’ or a ‘K’) others just got on with it and invested in the belief that they had enough time to benefit from buying undervalued assets regardless of what shape the recovery would take.
For many of us, the financial impacts of COVID-19 have largely passed us by and, in some cases, it has made us better off. However, I must stress that this is not everyone. In their most recent COVID-19 report, the CFFC noted that 11% of New Zealand households were still experiencing severely reduced incomes. Christmas is going to be a difficult time for many of those families. My challenge to you is: if you are one of those lucky households that has been able to maintain your employment and finances, then please consider making a donation to a local food bank or charity. After all, Christmas is the time of giving.
Wishing you all a safe and happy festive season.
1. ‘Impact of Covid-19 on Financial Wellbeing - Key findings from a national survey’ Dr Celestyna Galicki, Commission for Financial Capability, May 2020.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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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.
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First published in the Otago Daily Times on 14 December 2020, as 'Worth taking time to review Covid’s effect a year on'.
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