Pandemic crises are rare. Economic downturns are not. Yet we see individuals, families, local and national governments, small and large businesses struggling to cope with a partial economic shutdown that has so far lasted for a few months.
One cannot help feeling a bit of déjà vu. The 2008 economic downturn had a significant impact on many businesses and individuals. Governments had to use taxpayers’ money to save banks as the alternative was more businesses failing and workers made redundant. This time around, I see little evidence that the vast majority have learned the lesson of the importance of saving for a rainy day. Most of those affected expect the government to rescue them from poverty.
One golden rule young families are often advised to adopt is to accumulate enough savings for at least six months of expenses. The reality is that many still live from pay cheque to pay cheque. Those who are employed in precarious work understandably struggle to follow this rule. But others relatively better off prefer to consume more rather than put some money aside for emergencies.
This most recent economic crisis has even impacted many who could usually be described as thrifty. These people rightly argue that in retirement, they do not want to depend on the state pension or on selling their house to release some equity that they could use to support their standard of living.
Unfortunately, while such people always embraced the virtue of saving for a rainy day, they often took risks in search of a decent return for their savings. Low-interest rates have not only brought about loss of regular income but are now destroying value for pension funds and individuals who rely on their savings to boost their meagre pensions.
In the last few years, I have seen little evidence of prudent people preferring to consume rather than save because the yields on investment are at best volatile and, at worst, negative
The financial media is now publishing various features on the best post-COVID 19 investment strategies for those who still believe in saving. The most recent crisis has proven that even the most prudent investment strategies did not prevent the denting of investment portfolios of many who were risk-averse. Equity and debt markets have recovered from the worst levels hit in March but no one can guarantee a low-risk exposure to these markets in the coming months.
The European Central Bank has confirmed that, in the last few months, bank deposits in EU countries have boomed. This is partly because households have had minimal opportunity to spend money on travel and entertainment. Another more worrying reason could be the fear that the economic downturn may persist and hoarding cash in bank accounts is a risk mitigation tactic that one can rely on. Another reason is undoubtedly connected with investors wanting time to make up their minds on where to invest to protect the value of their hard-earned money.
Do-it-yourself investment strategies should be left to the most experienced, even if no one has the silver bullet that guarantees decent returns and capital preservation.
Some serious investment amateurs may believe that they have the secret of success because they keep themselves informed by becoming addicted to reading investment analysis reports. Sometimes they are lucky and manage to make a brilliant investment decision. Most of the time, their strategies lead to as much pain as the failed investment strategies of experts.
The best way to invest always depends on the particular circumstances of the individual. Capital preservation has become a priority of many who understand that high yields can often be linked to capital erosion. Relying on honest advice of those who are well established as investment specialists is indispensable for those who are risk-averse and will eventually depend on the performance of their investment portfolio to preserve their standard of living.
The price paid for this advice is worth paying to mitigate the risk of financial markets destroying the value of your portfolio.
Most retail investors have reportedly not panicked in the current economic crisis. There were times where particular equity investments saw a fall of more than 50 per cent. But those who had a diversified portfolio saw much lower devaluations of their investments. Investment-grade bonds have so far held their prices well.
In the last few years, I have seen little evidence of prudent people preferring to consume rather than save because the yields on investment are at best volatile and, at worst, negative. Saving for a rainy day is still the preferred lifestyle strategy for those who want to rely on their own resources to prosper in all stage of life.