The outbreak of a new coronavirus in the Chinese city of Wuhan first made news headlines on the first day of this new decade. Since that first report, Covid-19 has fundamentally changed the world forever.
The shifts have been seismic and have permeated almost every part of our lives – including our financial lives.
One of the most significant ways our finances have been impacted is the policies of central banks around the world.
Struggling to ease the economic pain of the pandemic, they have driven us into an era of almost zero interest rates – with some experts saying that the US Federal Reserve and the UK’s Bank of England, among others, could be on the brink of implementing negative interest rates, as has already been done across the eurozone and in Japan.
This would have seemed impossible even a few months ago. But, as I said, everything has changed.
Ultra-low interest rates, which appear to be here to stay for the foreseeable future as economies are so weak, are a positive if you’re buying a house or paying off a student debt.
But they are quite the opposite for savers, especially for those planning their retirement or already retired.
This is why I believe that more than ever, serious, joined-up financial planning strategies are essential for those who are committed to growing and protecting their wealth.
In a zero-interest-rate era it’s simply not sufficient to think you can rely on the strategies of before and have the same lifestyle.
For instance, so-called low-risk bonds, such as US Treasuries, once the bedrock of investment portfolios, are not providing the returns they once did. Indeed, yields have been at historic lows, prompting many major investment banks openly to question their value.
Cash is certainly “not king” at the moment either. Cash sitting in accounts is most likely earning you almost nothing. It will definitely not be generating decent income at 0.01% or less.
Meanwhile, investing in stocks offers its own complexities in this new world we’re living in.
Global stock markets have, in general terms, been on an impressive rally in recent months. But delve into the picture and all is not what it seems. A handful of firms in a handful of sectors are bringing up entire indices.
A report from Michael Hartnett, chief strategist at Bank of America, highlights that just five companies – all Big Tech giants – account for 23% of the entire capitalization of the US benchmark index, the S&P 500. This is a historic concentration and is up 16% from the beginning of this year.
As such, now is not the time, in my opinion, to be buying exchange traded funds (ETFs) – which, again, have been a cornerstone of many people’s long-term financial planning strategies – because the markets are currently so unbalanced.
As Wall Street Journal columnist Brett Arends points out, “The entire argument behind index funds has a flaw: Namely that on the one hand each stock offers the same risk-adjusted opportunity as every other, but at the same time some stocks are worth 100 or 1,000 times as much of your money as others.”
And neither can you pile into a few companies currently doing well and believe that the share price will continue to Mars. That won’t work either. Or to use a phrase that’s common in our industry: “Past performance is no guarantee of future results.”
The world has been upended in recent months, meaning it would be unwise to rely casually on strategies that have hitherto consistently worked. They might – but they also might not.
I would argue the way to best-position financially yourself in these highly unusual times is to work alongside an independent financial adviser willing to think differently from before in the quest to seek out well-structured companies that have solid balance sheets and in sectors that look likely to continue to grow.
Identifying the “winners” requires knowledge, vision and experience, and the process needs to be kept under continual and impartial revision.
Nigel Green founded deVere Group in 2002 from a single office in Hong Kong after discovering a niche market for expatriates in the financial services sector. Since then, it has grown to become one of the largest independent financial advisory organizations in the world with offices and clients across the globe.