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.
Time Horizon
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.
Return
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.
Diversification
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.
Maryanne Ng’ang’a.Dr Pesa is Maryanne Ng’ang’a, an alternative investments analyst at Cytonn Investments.
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