The article “How To Protect Your Personal Finances Amid The Coronavirus Chaos” was originally published on Financial Post on March 18, 2020.
With more repercussions to come, there are still steps you can take to protect your financial wellbeing.
The initial financial implications of the novel coronavirus have been severe for investors. Stocks are down drastically over the past month from their recent highs, and volatility has been significant as markets swing up and down from day to day.
Canadians’ investment portfolios have taken the brunt of the financial impact from COVID-19 so far, but, with more repercussions to come, there are still steps you can take to protect your financial wellbeing.
Stock markets have moved steadily higher for several years since the 2008-2009 financial crisis. U.S. stocks have been the standout, rising about five-fold from the March 2009 lows to the recent February 2020 highs. For long periods of time, volatility was quite low, and investors may have become complacent as a result.
So far in March, there have been six days where the daily return of the S&P 500 has been up or down five per cent in a single day, and five more days of four per cent or higher daily changes. This is significant short-term volatility. three of the largest 20 daily percentage changes for the S&P 500 have occurred in the past week.
Meanwhile, the Toronto Stock Exchange has fallen almost as low as the 2000 dot-com bubble peaks. The energy sector has been particularly hard hit as oil prices have been cut in half since the start of the year.
There are two important tenets of asset allocation that coronavirus has reinforced. First, that risk tolerance assessment is important to ensure an investor is not taking on more risk than they can handle in the event of a stock market downturn. It is very difficult to anticipate stock market declines in advance, and investors should be discouraged from blaming their investment advisors for not avoiding stock market losses. This month has been a good test for how much exposure an investor should have to stocks in the first place, and an important discussion point with advisors moving forward.
Another important asset allocation consideration is that if strong stock markets in 2019 caused an investor’s stock exposure to creep up as a percentage of their portfolio, they should have ideally been selling stocks to maintain their asset allocation. Likewise, as stocks have fallen, prudent portfolio management suggests buying stocks to rebalance back to target — not selling as some investors have already done or may be tempted to do. It may seem counterintuitive to buy stocks when markets are falling and sell them as markets are rising but rebalancing by buying low and selling high can help an investor make unemotional investment decisions.
Interest rates have fallen. The Bank of Canada lowered the prime rate by a half per cent on March 4 and another half per cent on March 16. Variable rate debts have generally decreased by one per cent this month as a result.
Mortgage rates have fallen. Variable rates fall with the prime rate, and several institutions are now offering five-year fixed-rate mortgages well below 2.5 per cent. Borrowers should consider how best to restructure existing debts to take advantage of lower interest rates.
Those who have lines of credit should be aware that the loan agreements with their bank may allow the lender to decrease their credit limit or request repayment. If the long-term financial impacts of coronavirus lead to a recession, banks may be that much more cautious about how much risk they are taking with borrowers.
As a result, if you are counting on available room or low interest-only payments on your line of credit, be aware that the terms of your credit can change, and a recession could impact borrowers negatively. This warning is not meant to fear monger, but Canadians have become accustomed to relying on increasing credit limits and using debt to finance spending, particularly debt secured by their homes, and that may now be at risk.
The Canada Revenue Agency has extended the deadline to file 2019 T1 personal income tax returns from April 30 to June 1, 2020. Self-employed taxpayers and their spouses already have until June 15, 2020 to file their personal tax returns.
The deadline for payment of tax owing has been extended from April 30 to Aug. 31, 2020. No interest will be charged for balances due until Aug. 31.
Businesses will also have an interest-free extension until August 31 to pay corporate tax balances.
Revenue Quebec has matched CRA’s extension dates for Quebec resident taxpayers.
An economic downturn will lead to job losses. Canadians who are approaching retirement could be particularly at risk if a severance package comes earlier than expected.
Recent or unexpected retirees will no doubt be concerned about a significant investment portfolio decline as they enter retirement. An important consideration is how much of your investments you actually need in the next year. Ideally, a retiree should not be withdrawing more than three to five per cent annually from their portfolio early in retirement, though withdrawal rates may vary depending on a retiree’s personal circumstances.
Right now, the Toronto Stock Exchange has a dividend yield of about three per cent and the S&P 500 is yielding about 2.3 per cent. The weighted average yield to maturity of the FTSE Canada Universe Bond Index is about 1.8 per cent. Every investor’s portfolio will differ, but hopefully two per cent or more of an investor’s return will come from income over the next year. Dividends can be cut during a recession, but the point is a retiree should hopefully only need to use a couple per cent of their investment capital in the next year.
If an investor does not need to sell a significant portion of their stocks over the next few years, this will allow their portfolio the time needed to recover. Selling stocks at a low point now could be a knee-jerk reaction that causes temporary losses to become permanent ones. Selling and trying to time markets on the way back up may seem appealing in theory but can be difficult to do in practice.
For young savers, the recent pullback in stocks is a buying opportunity. Stocks are on sale, and dollar cost averaging will help an investor buy more shares when prices are low for every dollar invested. Those with a lot of runway to retirement should try not to be deterred from investing as a result of this sudden bear market. If you were happy buying in early 2020 after a strong 2019, you should be even happier buying now while stocks are cheap.
The COVID-19 pandemic is really concerning on many levels. It has had an initial impact on investment portfolios, but there will be a further ripple effect that will impact Canadians financially and otherwise for months and possibly years to come.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.