Coronavirus and why a regular savings plan may be the perfect solution
The failure to contain the coronavirus has led to large scale sells offs across broad equity indices as markets went from pricing in ‘no risk’ to a ‘moderate risk’ of a global recession. The Coronavirus spread currently sees no sign of stopping and the path of least resistance for markets now appears to the downside. The question facing many investors is where is best to invest?
Typically, an investors response would be to increase exposure to safe-haven assets: Gold, Government Bonds and Cash, looking to reduce risk asset exposure (equities, high yield bonds) as markets take a turn for the worse. The difficulty with this approach is it requires an element of market timing. Timing the market requires an investor to make two correct decisions: when to get out and when to get back in. Get the first one wrong and the market is already down 10% and you sell at market lows, get the other one wrong and the market is 10% higher. Get both wrong and you find yourself severely behind the pace.
Professionals spend 253 days a year analysing market data, movements and trends and only aim to be right 70% of the time. This puts your typical investor up against the odds. Unless there is another solution? A much simpler solution to tackling a bear market.
That solution involves utilising the benefits of Dollar Cost averaging through a regular savings account.
The Power of Dollar-Cost Averaging
Dollar-Cost Averaging takes away the problem of market timing. You are regularly investing money into the market over a period. If the market falls you begin to buy the market at a more cost-effective price and get more units of the fund for your money and vice versa, if the market rises.
Over the long run you obtain an ‘average price’ for the fund over the investment period. You want to invest your money at the lowest price to maximise the returns when the fund growth. Therefore, the maximum benefit of Dollar-cost averaging is when equity markets are falling, the periods where you are averaging down your price of purchase.
The benefits of opening and running a savings account can be heightened during market volatility. This means the greatest benefit occurs when you may have previously considered investing in safe-haven asset classes however you don’t have to time getting back into risk assets.
Why Regular Savings over Safe Haven Assets?
Moving the portfolio to safe haven assets requires an element of timing the market. The aim is to increase safe haven assets near the market top and reduce them near the market bottom. The issue many investors face however, is that things tend to look great at a market top and look the worst at a market bottom. The equity markets tend to throw unexpected corrections and rallies that can catch even the most experienced investor off guard.
Dollar-Cost Averaging takes away that problem. You are regularly investing the money into the market monthly over a period of time. As the market falls you begin to buy the market at a more cost-effective price and as the market rises you buy it at a higher price. Over the long run you obtain an ‘average price’ for the market. The benefit of Dollar-cost averaging is of course when equity markets are falling, the periods where you are averaging down your price of purchase, and so the benefits of opening and running a savings account is heightened during market volatility. The greatest benefit occurs when you may have previously considered investing in safe-haven asset classes.
The problem with the current regular savings model
The issue facing many regular savings accounts in the market is that they lack flexibility. They operate lengthy lock-in periods, penalties for redeeming early and penalties if you need to reduce or stop contributions.
It is the lack of flexibility in these savings plans that can make them a nightmare for financial planning. Few, if any advisers will have come across a client whose circumstances, ability to contribute or financial goals remain identical for 5 years let alone 25 years. Whether planning an unexpected holiday, your wedding or paying for your children’s education investors need a savings solution that is as dynamic as their life.
Introducing the Latitude Regular Savings Plan
No lock-in periods – This means access to your money whenever those unexpected circumstances may arise. Whether sixth months in to the plan or six years, Latitude will not charge you for withdrawing your funds.
Flexibility to increase, decrease or stop contributions – Given the majority of investor timelines exceed 5 years it is increasingly likely that your circumstances may change. Unexpectedly bills or windfalls, latitude allows you to alter your regular premiums whenever you like.
Cost effective with just 0.30% ongoing fee – Fees can act as the biggest drag on investment performance. Latitude has a simple 0.30% p.a. custodian fee resulting in larger returns for the investor.
The product allows the investor to pay the adviser three months premiums upfront or to pay the first three-month premium of the plan to their adviser and invest in the fourth month.
The product will pay 1.0% p.a. in adviser trail.
This gives the product a Total Expense Ratio of 2.25%.
To find out more please email email@example.com or call +971 (0) 4 325 2800.