Financial planning in tough economic times
Ratings agencies Fitch and Standard & Poor’s decisions to downgrade South African credit to junk status should not come as a surprise, says Gavin Mofsowitz, Senior Financial Planner at Alexander Forbes Financial Planning Consultants, but what does it mean from a financial planning perspective?
Rating agencies issued stern warnings around the potential downgrade last year, and, when we look back at history, emerging market developing economies like South Africa tend to be hit the hardest. South Africans can expect potential Rand weakness which could lead to higher inflation in the system prompting the Reserve Bank to increase interest rates. This chain of events could eventually lead to lower Gross Domestic Demand which will put increasing pressure on industry and more so on job growth. President Jacob Zuma’s cabinet reshuffle has also caused instability for foreign investors and ratings agencies alike. When countries experience higher debt, inflation and lower domestic demand its people suffer.
From a financial planning perspective it is good to return to the basic fundamentals of investing, and to review a client’s original objectives and goals set out at the start of their financial journey. It is important to remain focused on the initial investment strategy in order to achieve one’s set objectives. Investing is a long term process and advisers need to continually remind clients of this when we are faced with market volatility and uncertainty.
From an asset allocation perspective, provided there have not been massive shifts, regular rebalancing is always a prudent move. Diversification among asset classes is also of utmost importance, with adequate offshore investment needed to mitigate inherent portfolio risk. Fund managers make regular changes to portfolios and provided there are no material changes to a fund managers’ style and mandate there should be no need to start panicking by selling out of quality funds.
Using a quality Multi Manager in this regard can help make the asset allocation calls a lot easier. The easiest way to destroy any value created is panic - selling when markets are supressed. Clients need to be educated about ‘time in the market’ and not trying to ‘time the market’.
I also find it useful to help clients identify any additional potential shortfalls in their financial plan over this tough time. This can include:
• Ensuring your will is up to date and valid
• Confirming beneficiaries are updated on retirement funds and various other life policies
• Reviewing short-term insurance needs to make certain competitive and relevant pricing
• Looking at Life Policies and whether these are still relevant to your unique circumstances. What has changed over the past year?
• Utilising tax-free savings incentives to the maximum which include tax free savings accounts and retirement annuity contributions
• Understanding future medical and educational costs and applying an appropriate savings strategy
• Higher debt costs as a result of the downgrade will result in increased financial pressure, and this needs to be carefully managed and reviewed to ensure that one is not overly indebted
A comprehensive financial plan is required in these times. Fundamentals may very well be in check; however, it is always worthwhile reviewing this plan annually with a qualified Financial Adviser. This will ensure that the objective financial advice given remains current and also takes into account various regulatory changes. This plan could also include a holiday fund - and who doesn’t feel like a break right now!
Alexander Forbes Financial Planning Consultants (Pty) Ltd is a licensed financial services provider the information provided in the article is not advice, as defined in the FAIS Act.
