Pitfalls & Pitch calls: Safe harbour amid turbulent times

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 6, 2020 - July 12, 2020.
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Despite the equity markets plunging 30% in March alone, amid fears over the outbreak of Covid-19, investors have overlooked the possibility of a second wave of infections even as the number of cases continue to rise daily. The world seems to have returned to normal and we are just about to pop the champagne to celebrate having won the battle against the coronavirus.

But really, the propensity of central banks to employ a do-whatever-it-takes posture to support their economies appears to have played a significant part in this. The markets have recovered and have come close to the levels seen before the outbreak.

While many rational investors are sceptical about the market rally — citing weak economic data such as a high unemployment rate, weaker earnings expected in the second quarter of 2020 and the fear of a second wave of infections — they are now feeling left out while others continue to jump on the bandwagon in chasing the market highs. Regardless of what we “feel”, market volatility is here to stay. And many are worried that their retirement funds could well be at stake.  

So, how should we manage our wealth to help us ride through a potentially prolonged downturn and to strengthen our retirement war chest?

Many working adults are worried about losing their jobs as companies cut back on expenditure to survive the crisis. With the looming potential for this to become a reality, one can no longer just rely on company medical insurance benefits and forgo the need for a personal medical card.

As Malaysia has experienced one of the highest medical inflation rates in recent years, this is one aspect that we should take note of to protect our wealth from being eroded. Thus, even before thinking of making adjustments to our portfolios, the more critical consideration is to ensure that our medical safety net is independent of our current employer. Make this important decision to maintain peace of mind and to reduce stress later.

Then, assess your current situation. Just how large are the liabilities you are up against?

The golden rule is always to pay off the outstanding debt with the highest interest rate, which we call the debt snowball method. Manage your cash flow to ensure enough liquidity by setting aside emergency funds as well as idle cash to invest with without compromising on your current lifestyle.

The next thing to do is revisit your risk profile. In times like these, risk profiles change as do circumstances. You will be surprised at the end result. After reflecting, make the necessary decisions to suit your current circumstances. Once you have done that, look at your portfolio again and consider rebalancing it in view of the market volatility or opportunities within the context of the new normal we are facing today.

Pre-retirees who still have a source of income and want to boost their retirement funds by investing in equities should consider this strategy only if they have already planned for their near-term needs if they are to retire soon. It is unwise to be tempted by the current market volatility and overinvest your nest egg, thinking that you will be able to enjoy the profits soon after.

While many countries are slowly coming out of a lockdown, there is no certainty that the path to normalcy will be smooth. Questions over the risk of a second wave of Covid-19 infections, the projected path of economic recovery and what the new normal will look like remain largely unanswered. It is best to stay the course, invest as planned and use a dollar-cost-averaging strategy to benefit from this volatile market.

For retirees, the immediate thing to do is review your retirement plan and account for the new circumstances by adjusting your spending habits and holiday plans. In a low interest rate environment and uncertain market conditions, you would be looking for certainty of returns. With Bank Negara Malaysia reducing the overnight policy rate to 2%, there remains room for further cuts, which will leave us in a low interest rate environment for the near future.

Fixed deposit rates may no longer be as attractive. Remember, fixed deposits aim to provide you with short-term liquidity and are not for serving your longer-term goals. In a lower-for-longer interest rate environment, diversifying into endowment plans using funds that are not needed in the next five years can be a good option. The certainty of timing with endowment plans will ensure that they have the required funds for their living expenses when the time comes. Again, the options will depend on your risk appetite and investment horizon.

Lastly, just as central banks have announced that they will do whatever it takes to support the recovery out of the Covid-19 pandemic, it should be said that you need to do whatever it takes to increase your safety net. It is timely to review your insurance portfolio to ensure that you and your family are well protected against unforeseen expenses, as the last thing we would wish for is to leave our family in financial distress.

Insurance and estate planning tools continue to be important elements in our portfolio — if you want to leave something for your loved ones in the event of your mortality. Legacy plans can be a good alternative for those who wish to preserve their wealth amid a volatile market and to distribute it equally among their loved ones.

A post-pandemic environment is a clarion call to start planning for the unexpected and equip yourself to confidently weather the storms.

Michael Lai is executive director of wealth advisory (wealth management)at OCBC Bank (M) Bhd