Financial planning is a step by step approach towards managing one’s finances by systematically allocating resources to achieve financial goals and objectives. A sound financial plan is important as it helps reduce and possibly eliminate financial distress that may arise from various responsibilities and unexpected situations.
Due to the negative effects the pandemic has had on the economy, livelihoods have been affected in one way or another and as such, people have had to adjust financially to the new environment.
Part of financial planning is identifying the types of investment one is willing to make to help them achieve their financial goals.
In this article, we focus on factors to consider when making investment decisions during the Coronavirus pandemic. These include;
Analyzing your Risk Appetite
As the old age saying goes, the higher the risk, the higher the return. It is important that before investing, know your risk tolerance especially since the pandemic might have changed your risk profile.
It is important to understand that although the pandemic was unprecedented, markets have survived many crises periods before.
Take for example the Global Financial Crisis (2008) or China’s Economic Slowdown (2015). Investors who are still risk takers can invest in the Equities market given the current low valuations although it is important to ensure you do not go bottom fishing. You must research the company you are investing in well and ensure the business has strong fundamentals that guarantee its survival even after the pandemic.
For risk-averse individuals, the fixed income market can be your play. It is important to take on calculated risks and stick to a risk/reward ratio suitable for your risk appetite. Individuals whose income levels have been affected should re-evaluate their investment strategies to a low-risk plan.
Liquidity refers to how quickly one can convert an asset to cash and it varies from one asset class to another. Given that liquidity is the most important goal for a majority of investors at the moment, investors should focus on short-term investments like Unit Trust products such as Money Market Funds; as opposed to investing in long term illiquid assets such as Real Estate. Funds invested in such asset classes (Money Market Funds) can even be used as Emergency Funds given the high liquidity of such funds.
Due to the risk involved in long term investments, they tend to generally offer higher returns than short term investments. Before investing, an individual must evaluate the target for the investment chosen and the length of time for which they are willing to hold illiquid assets.
The investment horizon determines the investor’s income requirements and desired risk exposure, which then helps in choosing the appropriate investment product. In the current market, investors venturing into the equities market are encouraged to have a long term view of their investments to give companies time to recover from the effects of the pandemic.
A rational investor should invest in products/ asset classes that would provide maximum return for a given level of risk.
The choice of investment depends on the returns available and the preference of the investor towards generating a stream of income or capital appreciation in their portfolio.
It is important to ensure that even when compromising on return to reduce the risk involved, the return you get should always be above inflation in the long run.
Lastly, remember the old saying, don’t put all your eggs in one basket? During this period, it is more important than ever for any investor to diversify their portfolio. Investing in different asset classes, ensures you spread out the risk while also diversifying your return.
Failure to diversify can result in investments performing worse than the overall market. One can choose to invest through Collective Investment Schemes (CIS) which are pools of funds that are managed on behalf of investors by fund managers. The amounts invested in the CIS are pooled and utilized by fund managers to buy stocks, bonds, or other securities that are in accordance with the fund’s objective.
In conclusion, when making an investment decision at this time ensure that you avoid making emotional decisions. Do your research well and avoid false news and rumours.
Investing in the right assets to fit one's objectives is of paramount importance. It is therefore important to ensure that you are constantly updated on what is happening in the market given that this will enable you to make the right investment decisions that are in line with your goals. One should also continuously assess if their financial circumstances have changed and readjust their financial plans accordingly.
The pandemic has affected individuals' disposable income due to salary pay-cuts, unpaid leaves, and employment termination, consequently disrupting their investments and savings plans.
As economic contraction continues, most individuals have been forced to take a more conservative stance in their investments plans to minimize the losses incurred, maintain adequate liquidity as well as re-evaluating their short term and long-term financial goals.
Even in the middle of the pandemic, it is important to ensure that we continue investing in a bid to ensure we are growing wealth or at least preserving value.
Dr Pesa is Maryanne Ng’ang’a, an alternative investments analyst at Cytonn Investments.