As world leaders grapple with the broader challenges brought on by the COVID-19 pandemic, it has become apparent that the socioeconomic consequences will linger longer than the virus itself. Despite being faced with the seemingly insurmountable fallout, investors must remember – difficult as it may be – to strike a balance between solving for current needs, while keeping their long-term goals firmly in mind. Nomi Bodlani discusses.
The present situation is dire: People around the world continue to lose their lives and livelihoods as infections rise, supply chains are disrupted, and the measures put in place to curb the spread of the virus impact global economies. Amid this extreme uncertainty, investors are tasked with looking beyond the current crisis and making decisions that will lead to long-term investment success. However, this is far easier said than done.
The power of now
Overwhelmed by a slew of negative headlines, business closures, job losses and health data, many of us are tackling this pandemic day by day. Focusing on the now is an appropriate and natural way to manage some of the panic, dread and frustration brought about by the uncertainty of the situation and has numerous benefits when it comes to shifting our perspectives towards the positive. Behavioural science tells us that our brains tend to value immediate returns or benefits above delayed benefits, and therefore taking actions that yield immediate results (such as solving day-to-day problems) gives us peace of mind and reduces anxiety. However, it is not the best way to approach our finances. This is especially true when investing for the long term because successful long-term investing requires us to take actions in the present, which yield benefits in the future.
Behavioural economics experts warn us of the dangers of “present bias”, which is the propensity to focus on current needs and desires, often at the expense of the future. This inclination is exaggerated during times of financial crisis and can lead us to make decisions that help us feel secure in the current moment, at the expense of our financial security in the future.
By way of example, many people who sadly lose their jobs over this period may decide to withdraw from their retirement savings to meet their financial obligations. If you are in this terrible position, try to take only as much as you need to see you through; rather than as much as you can. Understand that your very real present need will have an impact on your future financial security, but you have the ability to minimise the impact. Very often we make choices that if we reflected upon them with the benefit of hindsight, we would have done differently. Hindsight gives us a broader perspective; the trick is to try and bring this broader perspective into our day-to-day thinking. But this is easier said than done.
Daniel Kahneman, known as the father of behavioural economics, describes the tendency to make decisions in isolation, without fully accounting for all the relevant risks and data, as “narrow framing”. Put more simply, we take the problem at hand and deal with it as if it were the only problem. When it comes to withdrawing from our retirement savings early, it is particularly important to consider the consequences broadly. For one, you may be withdrawing your retirement savings at a time when markets are extremely volatile and may incur significant losses as a result. You could also be heavily taxed if you exceed SARS’s tax-free withdrawal thresholds. Crucially, this decision could ultimately compromise your quality of life and financial security when you reach retirement and are no longer able to generate a regular income.
So how do we solve for both important needs and ensure that present bias and narrow framing don’t lead us to disproportionately prioritise the present at an irrecoverable loss to the future? We need to find a way to strike a balance.
Striking a balance between your current and future needs
The next few months and years feel very unpredictable, however there are a few certainties we can bank on: The COVID-19 pandemic will end at some point, life will settle into a new normal, and the decisions we make now will have an impact on our financial positions long after the crisis has passed.
Perspective is important. At one extreme, we could tend towards being extremely pessimistic about our prospects and make short-term decisions. At the other, we could be overly optimistic about the situation and make decisions that are rooted in denial. Both extremes can lead to poor decision-making.
Surviving any crisis requires a balanced approach. We need to accept the uncertainty, take precautions to protect ourselves and maintain enough optimism to see us through the current difficulties. This will take resilience, which we write about in Part 3 of this series. There are some simple things you can do to help you strike the balance:
1. Take stock of where you are
Your physical health and emotional wellbeing are your most important assets and should be factored into your financial planning. We are less likely to make good decisions when we are not coping, so it is important to start by taking stock of how you are feeling and assess the toll that the pandemic is taking on you. If you are struggling to cope with this extraordinary situation, consider reaching out to your loved ones, connecting with your community, or consulting a healthcare practitioner for professional support.
2. Revisit your goals
Your ability to achieve your long-term objectives may be hampered over the short term by the current circumstances, but it is important to remind yourself that this will not be the case forever. Revisiting your long-term goals regularly allows you to broaden how you frame your current position and may give you the clarity you need to make decisions that balance your current needs with your goals for the future. Armed with clear objectives and a disciplined approach, you will be better placed to navigate the prevailing uncertainty. Part 2 will talk you through this in more detail.
3. Seek expert advice
In times of crisis, we are prone to experience a range of emotions, including fear, anger and powerlessness. While these emotions may be appropriate for the circumstances, they cloud our decision-making processes. As we will discuss in detail in Part 5, independent financial advisers play an invaluable role during these periods: They can offer a rational, holistic perspective of your unique circumstances and have the expertise and objectivity to help you make appropriate financial decisions that address your current hurdles, without jeopardising your ability to cross the finish line.
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