COVID-19: Your Money Questions Answered
The spreading coronavirus has changed our daily lives as we know them. Grocery runs are meticulously planned events. We host family dinners on video calls. Those fortunate enough to be working are doing so from the kitchen table, while kids beg for attention. As stock markets bounce up and down, many of us are left wondering what this will mean for our retirement and our future.
We know this is a difficult time. As you navigate the financial challenges surrounding this crisis, we wanted to answer as many of your questions as possible so you can better understand the situation now and make decisions for your future.
Some of the most common types of questions we’ve received deal with:
- What’s going on with the economy
- Managing financial emergencies & investment withdrawals
- How to approach investing now
We’ll continue updating this article as things unfold. If you still have questions as you read through, email us at [email protected], and we’ll do our best to answer.
1. When will the economy recover?
It’s impossible to predict exactly when the economy will recover. The expected recession we’re seeing now is unlike those that have come before it. The containment measures to control the spread of the virus has resulted in the global economy grinding to a halt as whole industries pause operations to protect their employees and customers. As a result, we are seeing loss of corporate earnings, significant layoffs, and extreme uncertainty in global stock markets.
The severity of this expected recession will depend on the magnitude and duration of containment efforts. It’s encouraging to see jurisdictions across the globe mobilize quickly to expand testing and enforce physical distancing. Meanwhile, the scientific community is moving quickly to develop vaccines, with human trials already underway.
Stimulus is the other part of the economic equation, and governments and central banks around the world are taking extraordinary measures to cushion the blow of the crisis for individuals and businesses. In Canada, the government is offering relief for those suffering from lost income which should help keep many in their homes and out of bankruptcy.
Follow our Market Update for monthly commentary on what’s happening with the markets, and how that’s affecting CI Direct Investing portfolios.
2. Are interest rate cuts a good thing? What impact do you expect them to have?
Both Canada and the US have introduced rate cuts, which we believe is a good thing given the high level of uncertainty we’re seeing right now. Historically, low interest environments have been effective at stimulating demand during slowing economic times. In the short-term, these measures should provide some stability and mitigate the downside on equity markets.
3. How will the market downturn impact the housing market?
We expect to be entering a recession and typically that means fewer people will buy and sell homes which can impact pricing.
Meanwhile, immigration has been one of the leading drivers of the high housing prices we’ve seen in metropolitan markets over the past decade. It’s unclear whether we’ll still see the same demand for people moving into Canada when we come out of this crisis. If the level of immigration changes, that’s likely to impact the housing market.
4. I’m worried about losing my job. How can I financially prepare for that possibility?
The first thing you should be looking at right now is whether you’ve got sufficient cash available to cover your expenses, ideally for 6 months. Even when times are good, an emergency fund should be a key element of your financial plan.
If you don’t have that kind of cash available and you’re still earning an income, now is the time to whittle down your expenses and save towards this emergency fund. A good strategy is saving a portion of your income every time you get paid. If you’re expecting a tax refund, that may be an opportunity to accelerate these savings.
If you’re currently employed, now would also be a good time to look into credit sources such as a line of credit. If the interest rates are reasonable, (say, less than 10% unsecured, or prime plus 1% for a secured loan) this type of credit can help to extend your cash runway in a crisis. You’ll want to do this now because it’s harder — and may not even be possible — to obtain credit when you’re unemployed.
5. I’ve lost my job and need extra cash for expenses. With low interest rates, would it be better to use a line of credit or take money out of my investments?
It depends. If the interest rate on your credit is significantly less than the decline you’ve experienced in your portfolio, then you may consider using the credit in the short term to give your investments time to recover.
Of course, you can’t know for sure when the trade-off tips in favour of cashing out. The bigger the gap between your interest rate and your investment losses, the more likely using credit is the better option. Find out more about your options for funding a financial emergency.
6. Should I delay withdrawals as long as possible to prevent selling while the markets are down?
There have never been more varied forecasts from economists about what’s going to happen in the next few months than there are right now. Nobody knows for sure what will happen in the very short term.
Our advice is this: if you can defer expenses and withdrawals from your investments in order to provide time for recovery, then do so. If you absolutely have to use the money in the next year, then consider moving the money you need into something safe, like a high interest savings account until you spend it — that way you can stay protected from market volatility while still earning some interest.
7. How will this downturn impact my retirement? Is there anything I can do about it?
If you’re retired, you may want to lower your regular investment withdrawals right now if possible, particularly if you have other accounts or income sources you can use for day-to-day spending instead. It’s a good idea to speak with a financial adviser about your options.
The government has reduced minimum withdrawals on Registered Retirement Income Funds (RRIFs) by 25% for 2020, which will help retirees limit how much of their retirement investments need to be sold at this time.
8. The markets are ticking up. Does that mean we’re seeing a recovery?
So far in April, stocks have begun to trend upwards from their March lows. Yet the virus is still spreading rapidly and having a significant impact on the economy. It’s far too early to say whether this is the beginning of a recovery. Be prepared for markets to yo-yo in the weeks or months ahead.
9. I’d like to invest, but I’m not sure about the right time. How will we know that we’ve reached the bottom?
You can only recognize the top or bottom of the market when you’re looking in the rear view mirror. Investors who panic and sit out of the market waiting for a bottom often miss the beginning of the recovery and set themselves back. That’s why it’s best to save and invest regularly instead of trying to find the perfect time to invest.
10. Should I sell my investments and keep my money in cash to avoid further losses until the market rebounds?
In times like these, it’s especially important to avoid making decisions based on fear. Consider what you are saving the money for, and when you plan to spend it.
If you don’t need to spend the money in the next year, then you should consider staying invested. As long as you’re still invested, you technically haven’t lost anything because your investment can still go back up. But when you move to cash, you’ve locked in your loss and, if the market recovers, which historically it always has, you’ll miss out.
History shows us that missing just a few of the best days in the market is costly, and can eat away over a third of your performance compared to staying invested. For instance, over a period of roughly 38 years, missing the best 5 days of the S&P 500 would have cost an investor 35% of their return and missing the best 10 days of the S&P/TSX Composite Index would have cost an investor 36% of their return.
If you absolutely need to spend the money you have invested in the next year, then you may need to consider selling some of your investments – even if it means you are selling them at a loss. This decision shouldn’t be taken lightly, and you don’t need to make it on your own: it’s a good idea to speak with a financial adviser who can help you make the best decision for your circumstance.
11. Should I stop contributing to my investments until markets are more stable?
That depends on your individual situation. If you don’t have an emergency fund and can afford to keep saving, consider building up some emergency savings. Then, if you can still afford to save and invest towards your long-term goals, do so.
If your needs have changed as a result of lost income, you should consider holding off on contributions to prioritize essential expenses.
If they haven’t changed, we do feel there is an opportunity for long-term investors right now. While continued volatility is certainly possible in the near future, contributing to your investments now means your money will be invested at a lower price than earlier this year and will be well positioned for growth in a market rebound. Here’s some additional perspective on investing during a downturn.
12. Given the current fluctuations in the stock market, should I make small, frequent investment contributions, or wait to make bigger lump-sum contributions?
Sitting on cash until the “right moment” means you’re trying to time the market. That’s really, really hard to do, even for professional investors.
That’s why, regardless of what’s going on in the market, automatically investing every time you earn money is a great strategy. By making regular contributions over time you average out the cost of your purchases and systematically benefit from buying low during the dips.
Keep in mind that this strategy works best when you are talking about saving a portion of your income regularly. If you have cash to invest, your best option is to invest it as soon as possible and keep it invested for as long as possible. For example, if you get paid every two weeks, then save and invest every two weeks.
13. Where should I put my money to take advantage of current investment opportunities?
Typically, your investment strategy shouldn’t change based on volatility in the market. As always, we recommend investing in a diversified portfolio matched with your investment goals and financial situation. For CI Direct Investing clients, your portfolio is professionally managed and diversified to help your reach your goals.