The Coronavirus (Covid-19) in Financial Planning Perspective
What to do?
It almost feels like there is nowhere to hide. Major stock indices in Canada (S&P/TSX), the US (S&P 500) and the developed world outside of North America (MSCI EAFE) are down 25 to 30 percent in the space of a month. Bonds, which are generally considered a good counterweight to stock market volatility, went up during the first week of March but have been on a downward trend since March 9 (I am writing this on March 18). Cash and cash-like investments like GICs may not be going down but are yielding less and less over time.
Eleven years ago, the stock markets emerged from the Great Financial Crisis (aka the GFC) of 2008-2009 to begin one of the longest “bull runs” in my lifetime. The Coronavirus has now chased the bulls away and left room for the bears to take over the market for a little while. Historically, the markets have always come back to outperform the previous highs. How long that will take is difficult to predict, however.
Even so, there are some options to consider even in what feels like a desperate time. Here are five suggestions:
Reduce your debt
We have repeatedly heard that Canadian households are deeply indebted. The high cost of housing in Canada’s major cities is certainly a significant factor, but much of the debt has also been fueled by consumer spending. If you have an income, now is the time to pay down that debt. If your debt comes from multiple sources – car loan, credit card, unsecured line of credit, personal loan – choose the item that has the highest interest rate and pay that off first, while maintaining the minimum required payments on the other sources of debt.
Build up your emergency fund
An emergency fund is meant for emergencies. Given all the declarations by our federal, provincial and territorial governments, I don’t think that anyone would dispute that we are in an emergency on a society-wide level, even if we still don’t feel like it has affected us personally. Most financial experts recommend that households set a goal of saving three to six months worth of living expenses as your emergency fund. Since it may take several months before the Coronavirus runs its course, six months may not even be enough. Stretch it out up to a year if you can, and, if you are not at the six-month, or even at the three-month, mark, get started on it now.
Where should you save your emergency fund? The money needs to be accessible. In terms of account types, in my opinion, you should not treat money that is in your Registered Retirement Savings Plan (RRSP) as an emergency fund. The tax consequences of a withdrawal make the RRSP an inefficient source of cash. If you are interested in a registered account of some type, the Tax-Free Savings Account (TFSA) can serve that purpose. Alternatively, a non-registered savings account is a good choice. Many of the online financial institutions offer much higher interest rates than you will find at any of the “Big Six” banks. Because you want the money accessible within a day or two, and without penalty, you should not tie up your money in a Guaranteed Investment Certificate (GIC), unless it is redeemable GIC.
What if you have a TFSA in a diversified investment portfolio but don’t have a lot of extra cash for an emergency fund? Consider selling part of the fixed-income portion of your portfolio to bring it back into line with your targeted allocation. To illustrate, suppose that at the beginning of 2020, you made a new contribution to your TFSA and set the asset allocation at 50% fixed income and 50% equities. Imagine that your TFSA was worth about $50,000 before the markets began to roil. Now it’s worth about $40,000. Because of the fall in the equity markets, the fixed income portion of your account is now up to 55%. You rebalance, but instead of shifting money back into equities, you set aside a portion in cash that you can withdraw if/when needed for an emergency.
Rebalance your portfolio
You don’t carry any consumer debt and you have an emergency fund that is sufficient for a year’s worth of living expenses. If you are in that situation, you probably have an investment portfolio. The way that the stock market has taken a tumble, your investment portfolio is likely no longer allocated according to your target. That is, you have too much in bonds (fixed income) and not enough in stocks (equities). You may want to go ahead and get that balance back to the allocation you had originally intended.
What if these recent events have you reconsidering the whole idea of investing in inherently risky assets like stocks? A crisis is probably not the best time to make a drastic change. However, if you are a DIYer, consider whether you need to consult with a financial professional. If you have an investment advisor, ask whether your portfolios are at the right level of risk for your goals.
Harvest your losses
If a portion of your investment portfolio is in a non-registered account, you could very well have some positions that are now well into the negative. You could sell those positions and use the loss to offset any capital gains you may have had in the past three years or carry the loss forward indefinitely to offset future gains. You would then use the proceeds from the sale of that particular investment to buy another investment.
For example, if you held XIC, the iShares Core S&P/TSX Capped Composite Index ETF, which tracks the performance of the S&P/TSX Capped Composite Index and sold it for a loss, you could immediately turn around and buy VCN, which seeks to track the FTSE Canada All-Cap Index. The two hold very similar investments, but as they track a different index, they avoid the CRA’s rules concerning a “superficial loss.” See my previous blog post, “Taking Advantage of a Loser: Tax Loss Selling,” if you would like to learn more about this topic.
At the depths of the financial crisis in late 2008 and early 2009, I took a phone call from an older gentleman who told me that this crisis was a once-in-a-generation opportunity to buy good investments at cheap prices. Who doesn’t love a sale? If you have minimized your debt, saved up a solid emergency fund, and have your investment house in order, you may want to add more money to your investments. “Almost everything is 25% off!” Please don’t misunderstand me. I am no good at timing the market, nor do I know anyone who is. The markets may continue to decline. But, if you routinely add new money to your investments (for example, on a bi-weekly or monthly basis), a dramatic drop in the price of the investments you buy is not a reason to discontinue the practice.
Stay in touch with your friends and family
As I’ve written elsewhere, “money is a tool for living, not the purpose of our existence.” Living is the important thing. Take some time to connect with your friends and family. Given the understandable and appropriate concerns to slow down the spread of the coronavirus, physically meeting with the people who are close to you may not be possible or advisable. As someone with a compromised immune system thanks to the medications I take for my transplanted kidney, I appreciate this guidance. That does not eliminate the ability to connect with people via email, phone, text message, Skype or FaceTime, etc. Perhaps you could even help a potentially vulnerable neighbour get some groceries so they don’t need to run the risk of infection. I am no more able to forecast the future than the next person, but, optimist that I am, I’m inclined to believe that this emergency will lead to positive social change of some yet to be determined form. Be well, everyone.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.