Things to Learn from Past Crises: Role of Financial Planners During Times of Crisis

Things to Learn from Past Crises: Role of Financial Planners During Times of Crisis

The outbreak of coronavirus has severely impacted countries across the globe. As per the situation report released by the World Health Organization on 27 March 2020, there were a total 597,252 confirmed cases of coronavirus around the world. Governments around the world have taken necessary steps and released advisories, raising awareness to prevent the spread of the deadly infection. People have been advised to stay indoors and continue to work from home.

Many countries have put a travel ban to prevent any further transmission of the disease. This has also impacted the businesses of various companies. As a result, the stock prices of companies across sectors have dropped. Investors have started selling off their holdings and hold cash balances with them out of the fear of incurring further losses. In such a scenario, the role of a financial advisor becomes critical.

A financial advisor helps in making the right investment decision based on multiple choices. He would check the financial health of your portfolio and would take stock of alternative assets like bullion or currency. He would take you through various alternatives with conviction after studying your risk tolerance and preferences, counsel you on the effectiveness of asset classes and put forward a recommended allocation of your investable assets. The financial advisor will take into cognizance the volatility of the markets and the risks pertaining to the portfolio at any point of time and suggest suitable tweaks to the same on an ongoing basis. The advisor also keeps a record all the investment-related information and consolidates them on a periodic basis.

We all are aware that the outbreak of coronavirus has shaken the entire world and people are taking measures to prevent the spread of the infection as far as possible. The world economy has been impacted severely with the rising cases of COVID-19. However, one thing is for sure that this is a phase of turmoil, and things will get back to normal once the antidote for this deadly infection is found out.

There have been cases where investors have experienced a tough time in the past. These times have reverted back to normalcy and investors were also able to restore value to their portfolios.  Amongst the most notable of the crises that happened in the past, we are reminded of the great recession in 2008 and the SARS epidemic in 2003.

If you compare COVID-19 outbreak and SARS in 2003, the impact of coronavirus is much broader than the impact of SARS (Severe acute respiratory syndrome), and the symptoms in both the cases were almost the same. These were fever, dry cough, breathing problem, etc. At the time of the SARS outbreak, nearly 8,000 people were infected out of which around 775 people died. Both the diseases originate from the same family of viruses. However, in the case of COVID-19, the extent of people getting infected is vast.

What happened at the time of the SARS outbreak?

SARS initiated during November 2002 but did not have an impact on the markets till March 2003. However, after the WHO issued a global alert about this disease in Hong Kong and Vietnam, stocks across sectors in Hong Kong underperformed those in peer markets across the globe.

Worldwide telecommunications networks facilitated collaborative research among 11 laboratories located in geographically diverse regions, helping them in the identification of the new agent carrying the infection within a period of just 1 month.

The airlines stocks dropped sharply but then recovered over a period of time. The earnings of the companies belonging to the hotels, restaurants and leisure industries declined but recovered within a few quarters after the epidemic was brought under control.

The primary catalyst for the rebound was a stimulus package announced for the economy of Hong Kong.

Things to learn from the financial advisors from past crises.

In the times of crisis, financial advisors have played an important role in allaying fears of investors that arise from the same, coupled with the impact of the crises on the financial markets.  To explain this, it would be better if we take a look at some examples.

Here we would consider the 2008 Financial crisis. Financial advisors at that point of time had also experienced a similar challenge, and they assisted their clients in the midst of a situation which is similar to that at present.

Just for information, the 2008-09 financial crisis was the most horrific economic disaster which happened after the great depression that had taken place during 1929/1930. It happened in spite of the immense effort of the U.S. Federal Reserve and Treasury departments. At that time, the prices of dwellings, for which loans were availed from banks by subprime customers, started tumbling as these customers were not able to repay their loans. As a result, banks had huge bad loans, and several of them offered to write down the value of these assets from their books, resulting in a banking crisis. The consequences of this crisis were that there were increasing levels of unemployment and collapse in financial markets.

At the time of the 2008 financial crisis, the clients were anxious about their investments as the value of their portfolios diminished to a great extent. They were worried about the loss of their livelihood. The financial advisors helped their clients based on the time on their investment horizon. For those investors with more time, were asked only to see whether the investment plan matched with the time they had estimated for achieving the results. In case there was time available, the investors were advised not to worry about their investments.

For those investors who were about to retire and were heavily weighted in equities, they were asked to defer their retirement plans and prepare themselves to take a lesser amount in the form of income. They were told to change their lifestyle in retirement from the one which they had anticipated.

During the Financial Crisis in 2008, there was an extreme panic situation, and people wanted to convert their investments into cash. Those investors who were able to get the cash missed on the market rebound.

At that time, it was advised that the clients should set expectations as there could be ups and downs in the market, which always happen in cycles. And this can also be taken as a lesson for the investors at the time of the present crisis.

What Does PIMCO has to say to investors at the time of the present crisis (COVID-19)?

PIMCO or Pacific Investment Management Company, LLC is amongst the top five financial advisory companies in the world and in such a situation, the company recommends that investors should stay invested. In a situation of crisis, there are chances that investors may take incorrect decisions when emotions take control of their minds. They tend to purchase out of enthusiasm at the time when the market is doing well and sell when they are scared that the market is declining. When the market stabilizes ultimately, those investors who stay invested are the ones who are benefitted the most.

In a situation of crisis, PIMCO advises diversifying with bonds. Bond markets are one of the largest in the world securities market and offers investors with virtually unlimited investment choices. A bond is a loan that is being issued by the company that wants to raise fund. It is a debt instrument and is also issued by the governments, corporations as well as municipalities at the time they require capital. Since the evolution of the modern bond market, the investors have used bonds as a means to diversify their portfolio, generate income and preserve capital.

PIMCO also says that the investors should be careful of Investment biases. Investors are advised to control their emotions while investing. Once they can take control of their emotions, investors can make better decisions and achieve superior structuring of their investable assets leading to better results.

When we talk about the emotional biases, we must keep in mind that these arise from emotional factors like impulse or intuition, which distract the cognitive as well as the decision-making abilities of an individual.

Emotional biases arise out of fear and desire, unlike cognitive biases which are mental short-cuts that sidestep reasoning. Actively working to take control of emotions while making investment decisions can result in better outcomes.


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