The Covid-19 pandemic has been a strange experience in so many ways. One of these is the fact that, despite widespread furloughing and many job cuts, a huge proportion of people have said they have been able to save more in recent months than they usually would. Turns out not being able to leave the house for four months has some benefits.
But what to do with these unexpected nest eggs. Splash out on a big holiday when things calm down or buy a fancy new car? Maybe do those home improvements you’ve been putting off or stash some money into a Jisa for your kids? One major financial milestone that many people might be considering is paying down their mortgage.
It’s the biggest financial commitment most people will take on in their entire life and getting rid of this ball and chain as soon as possible is a sensible goal. But, strangely, a number of experts advise against it.
Why? Debt is ludicrously cheap. The amount you save on interest payments by overpaying your mortgage when base rate is at 0.1% will likely pale into insignificance compared with the gains you could make by putting the same money into the stock market.
Logically, that argument makes sense. Why save 1% when you could make 10, 15, or 20%? It all comes back to that thing so many of us have been craving these past few months: certainty. I know for a fact that if I pay off my mortgage, that debt is gone. I do not know for certain which way the stock market will go. It’s an unpredictable beast at the best of times – and these are, patently, not the best of times.
But this is why we talk about the importance of assessing your risk appetite and only choosing investments that won’t make you lose sleep at night. Investing is far more about emotion than maths, and the same rules apply to the rest of your finances. If you crave surety, then regardless of the numbers, ramping up the risk is unlikely to be the right path.
Beware the Boom
The upward trajectory that some funds and investment trusts have been on for the past couple of months is pretty mind-boggling when you think about it. We are by no means out of the woods when it comes to this global pandemic, but you wouldn’t think that by looking at some of the performance figures.
China shocked the world when it put Wuhan into lockdown in January. You probably would have laughed if someone had predicted that, come July, China-focused funds would be the best-performers in the investment universe.
For investors who stayed the course through the worst of the sell-off, it’s undoubtedly good news. Any form of bounce back will be a welcome relief to the pain of a plunging portfolio. But I worry about how long these good times can last. Market sentiment is so fragile, a second wave or unexpected piece of bad data could easily unravel the recovery.
I’m not saying now is the time to sell – we know it’s time in the market, not timing the market that counts – but gung-ho investors riding this wave of optimism and ploughing more money into the markets could end up getting burned.
Generation Gap
An interesting survey landed in my email inbox this week, courtesy of US stockbroker Charles Schwab. Apparently 38% of millennial investors in the UK have seen the value of their investments grow over the past three months, compared with 15% of those in the Baby Boomer generation.
While some young people might feel vindicated in their previously unconfirmed but long suspected investing prowess, I’d suggest this probably has more to do with lifestyling than talent. Investors in their 20s and 30s are going to have most, if not all, of their portfolio in equities and particularly the exciting tech-focused growth names that have really thrived in the lockdown environment. Those approaching retirement age, quite rightly, will have a big chunk of their portfolio in bonds and even cash – safe and reliable, sure, but no double digit returns on the horizon.
For Project Get Young People Investing this is great news, though. If people see there are gains to be made even during these unprecedented times, surely they will be more inclined to keep going when the volatility stops. For the investment world this seems an amazing opportunity – let’s hope it’s not wasted.
