It’s probably fair to say that most Canadians will be happy to bid farewell to 2020, and there are still three months to go until the end of the year.
The pandemic has taken a heavy toll, from the loss of lives and jobs to the disruption of schooling and retirement. Financially, countless individuals and families across the country have been negatively impacted.
While it’s easy to focus on the negative, we believe there are lessons to be learned from the pandemic that will help us emerge stronger in the years ahead. Here are four of them.
Lesson 1: An emergency fund is essential
This year, countless Canadians have lost jobs, struggled with collapsing businesses or faced sharp declines in their investment returns. For many, this has resulted in a major cash crunch and enormous financial stress.
The current pandemic may be a once-in-a-100-years event, yet we can be confident that other crises will emerge during our lifetime. That’s why a key takeaway from this pandemic is the importance of establishing a financial safety net.
Whatever your financial situation, setting aside enough money to cover at least 3–6 months of your living expenses is not just a good idea – it’s essential.
Lesson 2: We can all reduce wasteful spending
Amid the financial fallout from the pandemic, many Canadians have been reviewing their spending with a more critical eye. With incomes squeezed or disappearing for many, it’s no surprise that people have been looking for ways to trim their monthly expenditures.
From rarely used subscriptions to frequent dining out, it’s up to each of us to decide what we consider essential versus frivolous. Yet for most of us there are opportunities to reduce unnecessary spending.
You work hard for your money, so you owe it to yourself to ensure you’re not wasting it needlessly.
Lesson 3: A portfolio loses value more easily than it gains
The global spread of COVID-19 rocked stock markets in early 2020, with the TSX Composite Index plunging by 21.6% in the first quarter of 2020 compared with end-2019. Although the sharp drop has been followed by a relatively rapid rebound, the index is still short of its February 2020 peak.
For investors, this fluctuation during the pandemic has provided an important reminder for investors: if your portfolio drops by 20%, it will take more than a 20% rise to return to the level it was at before. Why? Because a 20% drop in a $1,000 investment takes you to $800, but a 20% rebound takes you only up to $960.
The lesson here is that it can take longer to rise than to fall. So if you’ll need money in the short term to buy a house or for retirement income, your portfolio should generally favour low-volatility investments.
Lesson 4: Regular portfolio rebalancing should be a priority
Aligning your portfolio with your risk profile is an investment best practice, but it shouldn’t be a one-off event. Without regular portfolio rebalancing, a portfolio that was meant to be 70% equities may have risen to 90% in the pre-pandemic bull market.
The problem here is that when stock markets plunged earlier this year, this portfolio would have been exposed to much higher volatility and risk at 90% equities versus the intended 70%. With regular rebalancing, the portfolio would have locked in gains gradually during the bull market and faced the crash with only 70% equity exposure.
Rebalancing your portfolio regularly can mean forgoing some potential gains when markets are strong, but it also means you’ll be at a more comfortable risk level when tough times hit.
Translating lessons into action
The pandemic has shown us how difficult it is to plan for all eventualities. Yet is has also reminded us of the value of financial planning best practices.
To discuss how to apply these lessons to your situation and get on track to a better financial future, contact us contact us at email@example.com or at 647.349.7070.