After 2 “once in a lifetime” economic 12 years, how can you protect your assets?
In the space of just 12 years, the global economy experienced two events of market volatility that are considered “once in a lifetime” occurrences. As well as having an impact on economies, the 2008 financial crisis and 2020 Covid-19 pandemic are likely to have affected your finances too.
Many people will remember the impact of the 2008 financial crisis. It triggered a global recession and caused high levels of uncertainty. From job insecurity to large falls in the markets, it had a far-reaching impact. Then, just 12 years later, the Covid-19 pandemic created uncertainty again.
While the UK Government’s furlough scheme has provided support to help to protect jobs and limit redundancies, it’s come at a cost. The latest fiscal report from the Office for Budget Responsibility shows that over £1 trillion was added to the public debt, which is now above 100% of GDP for the first time since 1960.
Can two unlikely events occurring so close together be put down to bad luck? The report warns that while there are no guarantees, larger economic shocks could become more common.
The report says: “The arrival of two major economic shocks in quick succession need not constitute a trend, but there are reasons to believe that advanced economies may be increasingly exposed to large, and potentially catastrophic, risks. While the threat of armed conflict between states (especially nuclear powers) appears to have diminished in this century, the past 20 years have seen an increase in the frequency, severity, and cost of other major risk events, from extreme weather events to infectious disease outbreaks to cyberattacks.”
The report outlines the fiscal impact of the events and how to mitigate risk at a national level. But what can you as an individual investor do to protect your assets?
1. Think long term
One of the most important things to do when making financial decisions is to keep the long term in mind.
While investors experienced high levels of market volatility in 2020 due to the pandemic, this has calmed in the space of a year. Many investors who held their nerve and stuck to their investment strategy have seen their investment values recover or even rise in the months since, and one could say the same of the 2008 financial crisis. It may have taken longer for the market to recover, yet, when you look at the bigger picture, investments overall did recover from the crash.
We know it’s easier to say than to do, but focusing on your long-term goals can help immeasurably when a large economic event is playing out. If you’re saving for retirement in your 40s, market volatility is unlikely to knock your plans off course. That’s not to say you should never make changes to your plans or adapt. Changes and adaptations can be the right thing to do, but they should always result from careful consideration rather than knee-jerk reactions to what’s happening now.
2. Diversify your assets
Both the 2008 financial crisis and the 2020 pandemic have highlighted how interconnected the world is. Events happening on the other side of the world can quickly spread and influence markets globally.
However, even during these periods of downturns, some sectors were stable and, in some cases, even thrived in the circumstances that were negatively affecting others. Spreading your wealth across various assets and investments can help reduce the impact should you see market volatility. This may mean choosing to invest in companies that operate in various industries, geographical locations, and have different risk profiles. Getting this diversification correct is an integral part of our investment process.
3. Understand the risks
You can’t eliminate risk entirely, unfortunately. However, that doesn’t mean you can’t manage risk, or ensure that you take an appropriate amount of risk for you.
All investments come with some risk. However, investments can have very different risk profiles. An established company with a record of delivering profits and growth is likely to be far less of a risk than a start-up. It’s important to understand your own risk profile, which should consider a range of factors, from goals to other assets, when making any decisions.
As a general rule, higher-risk investments have the potential to deliver higher returns. So, it can be tempting to invest in higher-risk ventures. However, if this doesn’t align with your risk profile, you could end up taking far more risk than is appropriate for you and potentially lose your initial investment. Your own personal tolerance to risk and the overall risk of your investment portfolio is vitally important. It’s something we review with all our ongoing clients in-depth on a regular basis.
Not all your investments need to have the same risk profile. As you create a diversified portfolio, you want the overall portfolio to reflect your investment needs.
How can Chambers Smith help?
If you would like to discuss your financial plan and the decisions you need to make about assets, please contact us. We can work with you to create a plan that puts you on the right path to reach your goals, with potential risks in mind, so you can pursue your goals with confidence. Or, if you already have a plan with us, we are always happy to discuss your ongoing requirements.
