4 Feb 2022
Having just experienced a near miss from Cyclone Batsirai...
I am very blessed to be living on this beautiful island of Mauritius in the middle of the Indian Ocean… However, with the beautiful weather, island and lifestyle comes a degree of risk in the form of cyclone season.
I have just witnessed the island-wide devastation that 150 km/h winds and a NEAR MISS from Cyclone Batsirai have caused. In her path lie debris and fallen branches, damage to personal and government property, carnage everywhere and here I find myself, having worked with and alongside financial institutions for 25 years, drawing a comparison to people’s need to prepare their own savings for a market crash or, in this case, a lesser but still damning market correction.
An investor who is unprepared for a market crash is akin to someone fighting a mob to grab fresh water at our local Intermart last minute and racing home in a Class III Cyclone Warning with the storm bearing down to prepare their home for the worst possible outcome. The only thing worse than that, are of course those of us who go with the old adage “It won’t happen to me” and do nothing at all!
In many ways, investors tend to behave like us here on the island. They have been advised repeatedly by us in financial institutions on how to prepare for a loss of income or market downturn, and they know they shouldn’t wait until we’re in a market crash to safeguard their financial lives and portfolios. But so many procrastinate because of a number of reasons… the economy has been doing well with markets rising for the last 13 years or they just close their eyes and hope it will all be okay.
Part of our job as advisors is to help your clients see the importance of preparing for a potential disaster in advance. It could be as simple as helping them make and periodically review a “cyclone checklist” to prepare them for major swings in the market.
Below are a few ideas to put on your “cyclone checklist”:
1. Emergency Cash
Keep at least 3-6 months of living expenses in high interest bank accounts or money market funds (more than this constitutes an inflation rate risk). This will help to ensure little or no crystallization of losses in longer-term investment portfolio.
2. Life & Health Insurance
Insurance solutions to cover both future medical and death events. God forbid this kind of disaster but these are not always prioritized or even optimized with an investment portfolio or life strategy. It is unthinkable to be in a situation where one has to strategize about selling shares when the market has fallen 40% or selling property that is badly priced an illiquid.
3. Create a balanced portfolio reflective of term to objective and risk profile
Ensure the right weightings between income and growth generating assets to help reduce volatility. To preserve the growth achieved, institute a reduction in the percentage of growth assets the closer one gets to the goal.
Dollar cost averaging (drip feeding) into the market during volatility also affords an opportunity to buy more shares when the prices are cheaper and less, when more expensive. It encourages a disciplined stream of dollar-cost-averaged contributions over a long period of time. This also removes timing which, without a crystal ball, is a low percentage shot and can be a great way to build wealth over the long term.
The benefits of diversification have been well established, it is though possible to over-diversify. Over-diversification occurs when each incremental investment added to a portfolio lowers the expected return to a greater degree than the associated reduction in the risk profile.
There is clearly more to managing your clients’ portfolios, but investors who follow these basic suggestions are likely to be much better prepared for the next economic/market downturn or life event. No one knows when the next crash or correction will occur but like cyclones in Mauritius, it’s only a matter of time.
Two more Cyclones look to be forming to the east of us, the question is not will they or won’t they form. The question is, are you prepared if they do?