In the space of just 12 years, the global economy experienced two events that are considered “once in a lifetime” occurrences. Ryan Marshall, Independent Financial Adviser at Pembroke Financial Services, says 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.
Ryan said: “Many people will remember the impact of the 2008 financial crisis that triggered a global recession and the uncertainty it caused. 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 government support in the UK through the furlough scheme has helped to protect jobs and limit redundancies, it’s come at a cost. The latest fiscal report from the Office for Budget Responsibility show that over £1 trillion was added to the public debt, which is now above 100% of GDP for the first time since 1960.”
With two unlikely events occurring so close together, can this 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 do as an individual investor 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.
Ryan noted: “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. The same can be said 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.”
It can be easier said than done when an event is happening, but focusing on your long-term goals can help. 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. However, these should be carefully considered 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 markets experience volatility. This may mean choosing to invest in companies that operate in various industries, geographical locations, and have different risk profiles.
3. Understand the risks
You can’t eliminate risk entirely, but that doesn’t mean you can’t manage risk or ensure that you take an appropriate amount 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,” Ryan added.
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.
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.
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.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.