Word on the Street
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Coronavirus – How the outbreak could affect your retirement plans
In this episode, we cover the latest on the spread of the coronavirus and talk about how investors, who are close to retirement, should approach market falls, with Phil Attreed (Head of Investment Consulting), Rob Smith (Head of Behavioural Finance), and Will Hobbs (Chief Investment Officer).
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Welcome to Word on the Street, a weekly podcast from Barclays UK where our experts help ordinary investors make sense of the latest news and events impacting the world’s financial markets.
In this episode, we cover the latest on the spread of the coronavirus and talk about how investors who are close to retirement should approach market falls, with Phil Attreed, Head of Investment Consulting, Rob Smith, Head of Behavioural Finance, and Will Hobbs, Chief Investment Officer.
PHIL ATTREED: Hello and welcome to this Word on the Street midweek special. I'm Phil Attreed, Barclays Head of Investment Consulting, and I'm joined here today by Will Hobbs, our Chief Investment Officer, also welcoming back Rob Smith, our Behavioural Finance expert, to help us plot a course through these turbulent markets. So for this edition, we thought we'd focus a little more specifically on the effects that turbulent markets are having on those a bit closer to retirement, or I guess an important event in their lives, and what these investors can do. Before we get into that though, Will, let’s briefly start with any news highlights from the weekend.
WILL HOBBS: Hi, Phil. Again it was really anything that is telling us about the path of the coronavirus that's grabbing most attention at the moment as you can understand. The interesting point in amongst all of this, one of our research providers, that is the third party specialists who we pay to delve into bits of the world of research that we can't reach with their own resources. So this particular provider has been scrutinising the number of tests that are coming back positive in various countries around the world. Now if you think about it, just extrapolating, a very low positivity rate, so a number of tests that are coming back positive say less than 5%, might be inferred as a sign that broad testing is being implemented in that country and that the majority of infected patients are being identified, ideally being quarantined too. So as an example South Korea has been down at 2-3% of tests coming back positive for a while now. Now on the other hand, a high rate, greater than 10% say, can be consistent with a more out-of-control outbreak, perhaps many cases are being missed, you've got low testing capacities potentially. Again you can make all sorts of inferences, more bad news to come basically. Now for a few days now, this rate of positivity has been slowing in Italy, which alongside the slowdown in actual new cases is tentative cause for encouragement as we've been saying on the last couple of podcasts that basically containment works, which we already had some evidence of from the Asian case study. Now on the flip-side, less positive here. there's currently much less encouraging news out of the US, but the authorities do look to be stepping up measures quite a bit, we saw a little bit of that over the weekend. So we’ll need to watch closely over the next couple of weeks there but that's broadly some of the things that have been going on anyway.
PA: Thanks, Will. And the weekend also gave us a little bit of time just to digest that massive US spending package which is now obviously being signed off. And I saw you pointing out in this week's Views on the News publication that this shouldn't be thought of as stimulus. I mean if US$2trn isn't stimulus, I'd love to know what is.
WH: Yes, that’s a good point, Phil. But in a way it's more about the objective, I think. It’s not really stimulus per se. This is very much in keeping with what we've talked about on this podcast that’s the authorities are trying to buy the economy time to go through the containment process. I heard it described, I thought quite aptly, as putting the economy into an induced coma, which I think is roughly right. There are three broad objectives from this particular package: first they're trying to bolster the health system, second they're trying to strengthen the social safety net, and third they're really trying to provide life support for many of the most affected businesses. These are small and medium-sized businesses in particular. That was discussed on last Friday's podcast (27 March 2020) with Ian Workman, one of the bosses of Business Bank. so these are the same objectives that you're seeing from many other policymakers around the world basically.
PA: On that policy response point as well, we've seen some pretty big policy decisions there. Does that potentially change the nature of government in some countries? Without getting too deep, what I mean is: might we actually see some of these measures stick around a little bit longer?
WH: It's a fascinating question and one of the questions that we'll be able to answer only really with hindsight. But there are like you say some people already suggesting that this is helping to show some parts of society how the state needs to play a permanently enlarged role. Now one very famous economist and libertarian a long time ago Milton Friedman remarked that there is nothing so permanent as a temporary government program. Basically it's always hard to take something away from the population. You may have to admit that at the weekend, there was some evidence of that. You may struggle to persuade my son of that; he gave his sister a library book for her ninth birthday at the weekend. It didn't go down too well I can tell you.
PA: I'm sure. Now let's turn to the retirement point. It's something a good number of investors do have to rely on is the flow of dividends from companies, many of us obviously throughout their pension schemes for instance and we've got to assume that a lot of these likely to be cut in the coming months in fact we're already seeing some of that this morning in Europe. What are yours and the team's thoughts on this?
WH: Yes, you are seeing this. It's the European banks I think they were at the centre of the dividend headlines this morning and we're pretty sure that it's not going to be it. There's not much solace we can offer income seekers in the very short run. What you can say is the market moves quite quickly to price in these cuts and what that means is if you see a stock or an index offering 10%+ dividend yields, it's likely not going to pay all of that this year, that's the truth of it. We still maintain though that this shouldn't be thought of in the way that we think of many previous recessions; it's somewhat like a short global war but one where masses of property and machinery is not destroyed. So in our opinion, dividends will return and maybe a quick bit quicker than some would assume they would otherwise. But in the short run there's not much consolation we can offer. Dividends will be cut there's no doubt about that across a range of sectors in all likelihood.
PA: Great thanks, Will. And Rob, welcome back to the call. When it comes to retirement, people now have quite a lot of freedom to choose what to do actually, whether it's drawdown, lump sum, taking tax-free cash. What's not clear is the drawbacks, I suppose, of all of this. Rob, you've spoken before about this, but what are the issues that the current situations can present?
ROB SMITH: Hi Phil. Yes, so the current retirement landscape is a little bit of a dichotomy if you like. At the start of the process, when we start working and at the beginning of our retirement journey, we have auto enrolment, which is a great scheme, which means that millions of people are automatically opted in to saving for retirement and therefore it bypasses the inertia that's needed to sign up for a pension which used to hold a lot of us back before. But it also means that people aren't engaged with the choices they're making. So on the one hand, we're acknowledging people aren't engaged enough to make the right decisions at the beginning of this journey because we're automatically opting them in, but then when it comes to retirement we suddenly have all these freedoms to choose from and we expect people now to be engaged and to know what to do and the right choices to make. This issue of not being engaged during the retirement journey can be a costly one because we don't gain the experience from being invested if you like so we're not necessarily seeing our investments go up and down and experience the market movements. So because we don't see the falls and the recoveries and the effect this has had on our portfolio over the long term, we don't really get any perspective on the experience of investing.
PA: Right. It's clear that retirement isn't a topic that most people find enthralling, certainly not as we would but we do need to try and be more engaged, investors need to be more engaged in order to make better decisions. What do you and the team know about investors’ experiences and financial characteristics particularly as they get older as they approach retirement?
RS: At Barclays you've developed a unique tool, which we call the Financial Personality Assessment. What it does it gives us an insight into our clients from investing psychology and it helps us to come better tailor solutions that we provide for them. But it also means that we've now been operating this for a long period of time and so we've gained some insight into how these attitudes change over time. If we look at Risk Tolerance, this is one's actually towards taking risk which is one of the classic markers to look for when you think about investing, we see that, I would say probably quite obviously, that Risk Tolerance tends to decline as people get older, which is a good thing because the classic advice is that we want to be taking in less risk as we get closer to retirement. But the interesting flip-side to that is another measure we have which we call Composure, which really looks at how someone experiences their investment journey and how anxious the ups and downs of the market will make them. The older people get, their composure tends to increase so they're less anxious. It may be that because their perception of risk is more aligned to their investment timeframe because they've been able to witness over time these markets ups and downs and can be a little bit more sanguine. So it actually seems that older investors may be better suited to deal with the current environment.
PA: Thanks Rob, That Financial Personality Assessment, over the last decade or so I've taken it about three times. It has been hugely useful for myself as an investor but also actually as an advisor to clients, it's useful because inherently I understand better my own biases and how they mix with advising clients as well. Obviously people's health and that of their families and friends will no doubt be front and centre of their concerns right now. I'm sure many who are close to or in retirement are definitely likely to feel a lot more engaged than they normally would do right now. What are the risks of this current environment for those investors?
RS: I think the biggest risk is really making a purely emotional, more instinctive decision rather than one that’s more thoughtful and more rational. So the recent market falls would have tested even the most stoic of investors. If you are one of those people who has a lower level of Composure and experiences more anxiety, then you might have to try hard to resist the urge to cash in your investments, if you like sell out of your investments and move to cash because by doing that you’re basically just essentially locking in any losses and ensuring you don't have a chance to recover from those. The most important thing you can try and do is to put everything into context. So firstly remember that investments you see in the news are not your investments. It's likely that your perception of investing and the riskiness of your investments are being based on the stock markets that are being reported most frequently in the news. The reality is that any sensible retirement investment will be diversified and the risk will reduce as you head towards retirement. So you will see likely losses in your own pension portfolios of course but they should be significantly cushioned from the wild swings that we see in the stock markets. I think the second important point is to think about horizon over which we're investing because the length of retirements that are now faced by many, we are still long-term investors. And this means that not only do you potentially need more growth for your investments to meet your new future expenditures and goals, but it also gives you the time to recover from any short-term losses that you might have experienced.
PA: Some useful points in there, thanks Rob. Will, I'm going to bring you back in here. I've heard you talk about cash as the only true safe haven. Does that still apply and at times like this should that influence whether I choose to diversify into riskier assets?
WH: When we talked about cash as a safe haven before, we talked about it in nominal terms, i.e. thinking about it without inflation because inflation is a risk to cash as we know. But in the absence of inflation, it's one of the assets that doesn't tend to lose its so-called nominal value, which means that unlike gold or many other things, it has been historically a more reliable safe haven in times like this. However, that safety needs to be balanced against your ability to use it as a resource to achieve your long-term financial objectives, so that opportunity cost. And remember that converting cash into a diversified portfolio definitely did not feel like a good idea back in March 2009, and that's the bottom of the last recession. There was actually one hedge fund manager famously urging of his well-heeled clients to go out and buy guns as many as they could for the impending collapse of society, when they would surely, these well-heeled clients, would be a significant target. Now if you look at that a diversified portfolio was still a very good investment at that point and the point for us is that our bet is that the world economy will keep turning and that's what drives investments over the long term. So that's really what to focus on.
PA: I'm going to turn to timing. I know the academic answer, but surely it's got to be tempting or at least maybe prudent to time my entry into investment portfolios, when the news is filled with the headlines that we're seeing right now. Will, I'll let you take that one as well.
WH: The simple answer is no and the academic answer is no, I'm afraid; there's no real difference between the two. I think a good example was last week. So amongst all that doom and gloom, we had the best week, the MSCI All Countries World, that's all stocks everywhere around the world, emerging markets, and developed markets, since the Great Financial Crisis in over 10 years. Now this is the same week that gave us the worst increase in US unemployment claims ever. The increase in unemployment claims registered last week was the worst by about five times, more than five times I think. So remember: the point is that everything everyone says, everything that they are worrying about at the moment, that should already be in the price. Markets are much more efficient; they assimilate new information much more effectively than many people give them credit for. Now try to take, I think the advantage that you can have at the moment when everyone is thinking only really about the next day, the next hour, so on, when timeframes are shortened, the advantage for certain types of clients who are able to think of it longer term, you're elongating your timeframe of investment, six months, one year, as long as you possibly can, you're giving yourself a huge advantage over other market participants at the moment. And the real question you need to ask yourself, and we've asked this a lot I know, but it's a really important simplification of what it's about to invest in a diversified portfolio, is: do I think humankind is going to continue to invent new things, from the jaw-dropping to the more prosaic and get better at using these new things now as they have for hundreds of years, some would say even thousands of years. Now I see no reason why not. So invest: you are getting a discounted entry point at the moment where markets are really musing on the down side threats a little more than they would usually, so-called left tail risks. So this is a good opportunity for investors able to think beyond that next couple of months and really take advantage of a little bit of a downside focus at the moment.
PA: I knew you'd set me straight and I have to admit I didn't see the 10% in the S&P coming last week either or on that particular day last week either so very worthwhile points. So finally the control word. We've spoken recently about the lack of control that people are feeling in these situations what does that mean for those around retirement, Rob?
RS: I think if you're coming close to retirement or even in retirement and your investments have fallen and this is obviously potentially impacting on your retirement plans that you already have in place. This may be making you feel like you need to do something in order to gain some control. The thing I'd say is: focus on what you can control. At the end of the day you can’t move the investment markets and as Will has mentioned, we can't reliably predict when we're going to be near the bottom in order to best time our investments. But you can control your own actions in response to this. So what this means is reviewing your retirement plans on a regular basis and the insight that I've gleaned from our experience as wealth planners, suggesting sensible things that we can do at this point in time: so if you're approaching retirement, now is a good time to review when you retire and how much you want to draw from your investments to supplement any other income or capital you have. And if you don't have any further funds to help cover any shortfalls that you may be seeing in your investment portfolio, then you may wish to think about: do you delay retirement, do you reduce your level of planned expenditure. And for those who have already retired or just retired there's a few things you can think about: whether you consider postponing any large one-off expenses or even slightly reducing discretionary spending. I think the important point is if you already have any cash pots available then it makes sense to use this money first and on the same note you use the natural income that your portfolio produces, which means that you can delay taking the capital out of your investment pot and give it more time in the market to recover from any of the short-term falls that we've seen. Ultimately in periods of poor performance, if you can be flexible with how much you draw and when, it’s going to help improve your eventual outcomes.
PA: Some good advice there, Rob, thank you and thank you, Will, and also you, our listeners for joining us for this Word on the Street special. Nicky and Will will be back at the end of the week when we hope you'll be able to join us again.
All investments can fall as well as rise in value and their past performance is not a reliable indicator of a future performance. This podcast is not a personal investment recommendation.
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