The Informed Investor
Should Your Financial Planning Strategy Change With Global Events?
June 1, 2021
No one can predict when a crisis or global event will occur. Take the coronavirus: it came out of nowhere, and now has impacted most of the world. After its onset in China, the country was put into an unprecedented lockdown, which meant manufacturing came to a screeching halt in some areas.
Since China is a hub for electronics, consumer products, and pharmaceuticals, what does that mean for your investments?
Willy Shih from Harvard Business School, an expert on Asian industrial competitiveness, believed this event would significantly affect the global economy. “The supply chain in finished products, as well as components, will be impacted,” he said. “China is such a force in the global economy. Some things are only made in China these days, and not just the usual electronics and toys — consumer products — it’s active pharmaceutical ingredients that go into pharmaceutical supply chains worldwide. If you look at travel, many airlines halted most flights. There was also a report out of France about how the number of Chinese tourists shopping for luxury goods in Paris has fallen off a cliff.”
As we now know, the impact would continue to trickle out of China into the world long after the coronavirus has done its damage. These effects would be seen throughout 2020 and beyond, but this wouldn’t be the only event that would affect the economy. The year 2020 also brought the presidential election and other global issues—some predictable, some unexpected.
To Change or Not to Change Your Investment Strategy
Investors who are investing in the stock market were likely watching the coronavirus and politics, wondering what they should do. Some may have been quick to sell, but unless they were short-term investors, that may have been a mistake. Why?
Part of a successful financial planning strategy is having a plan for good times and bad. Your strategy should not just be to “make money” or you may be subject to emotional decisions. A good investment plan should anticipate the ups and downs of the market and include a preplanned strategy for what you’re going to do when these types of events occur.
One key is the right risk management. If you are not prudently diversified, then a hit to one part of your portfolio may produce widespread damage.
But you probably need more than prudent diversification to help you feel secure through volatile times. That’s why you need an Investment Policy Statement.
Investment Policy Statements to the Rescue
An investment policy statement, or IPS, is a document created between an investment manager and his or her client. The document outlines general rules about investment goals and objectives. These rules have to do with asset allocation, risk tolerance, and liquidity. Also, the policy should have monitoring and control procedures followed by everyone involved in the investment process. This can help when it comes to portfolio rebalancing and targeting specific minimum and maximum asset allocations.
But the IPS goes even further: it also defines when you will change the strategy or the IPS itself. This is key. Why? Well, investing is inherently emotional. When our portfolio is rising, we feel good and feel like we’re smart investors. When the market drops—especially when it drops precipitously due to a global event, we tend to second-guess ourselves.
But the absolute worst time to make a decision is when you are under the grips of fear or greed. After all, these are the emotions that can often tell us to sell a stock right before it’s finally due to rebound or to load up on the latest hot sector that has been on the top for the last year (right before it runs out of buyers).
Investing Systematically, Not Emotionally
The Investment Policy Statement can help create the discipline to stay on course. More specifically: to act in accordance with a pre-planned strategy, not your emotions.
And when the market undergoes crazy days when it drops significantly, it can help to pull up the IPS that you and your financial advisor crafted and read it again. It will remind you why you’re invested the way you are. This can be comforting and can help you ignore the noise and keep your long-term goals in mind.
Singles, Not Home Runs
This is all critical because investing for your future is a marathon, not a sprint. You should be striving to achieve the rate of return you need to attain your goals, especially as you are nearing retirement. That can be very different from simply trying to beat the market’s index averages, which can lead you to take more risk than necessary.
Staying in Balance
An integral part of your financial planning strategy should also be rebalancing. Rebalancing a portfolio means realigning the percentage of assets and resetting it to the desired level of asset allocation and/or risk. So, if you started out with a distribution of 50% stocks and 50% bonds, but your stocks have grown to 70%, that means selling some stocks and buying more bonds to get back to that original 50/50 allocation.
Notice, in the process, you are doing something very smart: you are selling high (in this instance, stocks) and buying low (bonds).
Rebalancing should be part of your investment policy statement and handled on a consistent basis, too.
Getting the Help You Need to Stay on Track
Events like coronavirus might resolve themselves quickly, or as we saw, their impact may grow. What’s important is that you avoid emotional mistakes during these global events.
It isn’t always easy. On very high-volatility days, it can be painful to see red, as other investors dump their assets, you may wonder if you should join them. That is when having a high-quality financial advisor can help. You should be able to call or email your advisor for some insight and sound advice when you need it most. While he or she may simply pull up your Investment Policy Statement and review it with you, sometimes the ear of an experienced professional can help you put things in perspective.
In the long run, these are the steps that can help you avoid setbacks and keep you moving toward achieving your goals. Surprises good and bad, big and small, happen every day. But if you make a plan when the seas are calm, you’ll have a course already set for when things get rough—one hopefully written with the help of an experienced financial advisor and a clear head.
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 Powell, Alvin. “The Global Economic Impact of the Coronavirus Outbreak.” Harvard Gazette, Harvard Gazette, 13 Feb. 2020, news.harvard.edu/gazette/story/2020/02/the-global-economic-impact-of-the-coronavirus-outbreak/.