Amid the uncertainty of the coronavirus pandemic, what can you do to protect your finances? Here are our expert tips.
The coronavirus is what investors call a "black swan event", something completely unexpected and rare, that comes out of nowhere and throws everything out of order. That is pretty much what Covid-19 has done to global stock markets, which have crashed as the full scale of the health and economic emergency sinks in.
It also poses a major threat to everybody's pensions and investments, which have been plunging in value as well. So how should you respond?
1. Don’t panic
Possible the worst thing you can do is lose your head and sell every stock market investment you can get your hands on.
If you sell after markets have crashed, you are turning paper losses into real ones. Also, you will be locked out of the recovery, when it finally comes, as it will. Markets have always recovered in the past, often surprisingly quickly.
2. Think long-term
Never invest money in shares that you expect to need within the next five years, otherwise, you are at the mercy of events like these.
The stock market should only be for your long-term, retirement savings. If you do that, with luck you can hang on and wait for them to recover.
Everybody should hold enough money in cash to cover their everyday spending for at least six months, in case of emergencies. This should be held in an instant access savings account, or possibly an offset mortgage.
3. Seek opportunities
The brave few could take advantage of the current crash, by buying shares or funds, rather than selling them.
Think of it as a sale in the shops. Shares are going at a discount right now, so this could be a good time to snap up some bargains.
Again, only do this if you are investing for the long-term, as shares could fall even further. But in five or 10 years time, they should still be comfortably ahead.
4. Remember the dividends
At the time of writing, the FTSE 100 trades at lower levels than it did 20 years ago. That doesn't mean long-term investors haven't made money in that time, because they will have benefited from dividend income.
The FTSE 100 yields between 4 and 5 per cent a year, for more than cash, and if you reinvest that for growth, you will regularly buy more shares or fund units, which will compound over time.
5. Nobody can forecast the future
Nobody knows what is going to happen next. They never do. If you try to time the market, you could come unstuck. The trick is to leave your money therefore the long-term, and do not fret too much about day-to-day movements.
If that gives you sleepless nights, then avoid shares altogether. The problem is that alternatives such as cash will not protect the value of your money in real terms, especially in these days of near-zero rates.
The best advice is this: Never put all your eggs in one basket. Spread your money between shares, cash, bonds, gold and property. It is rare for everything to crash at once. Now that would really be a black swan event.
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