Study abroad: keeping finances on track to keep the dream alive

By Xian Chan, Global Head of Wealth Insights, HSBC Wealth and Personal Banking at HSBC

The Covid-19 pandemic has delivered a significant blow to financial markets globally and brought uncertainty, as never seen before. Yet, amongst the myriad of investment and saving decisions, financial planning for overseas education, for their children and next generation, still remains a key priority for investors.

Despite an interim shift to virtual classrooms, early indications show that prospective students still intend to travel abroad and pursue higher education. A recent survey* found that 69 percent of students with current offers from international universities expect to commence their overseas studies, as planned, once the pandemic is over.

Understanding the market volatility 

Market volatility, an increasingly prevalent trend this year, generally puts one’s financial goals at stake, including overseas education. In the current climate, our client discussions have frequently centred on ways to navigate financial markets. Adding to this mix, unfavourable exchange rates could materially burden the cost of international education in home-currency terms. Turbulent markets could mean investors may additionally struggle to achieve their target sum.

Perceived safe haven currencies, such as the US Dollar, have outperformed in 2020. On the contrary, the supposed riskier currencies, including those from popular education destinations like the UK (Pound Sterling), Canada (Canadian Dollar) and Australia (Australian Dollar) have all suffered.

The direction of currencies from hereon will likely correlate with the shape of global recovery. A bounce-back, whether U- or V-shaped, may benefit more economically sensitive currencies such as the Australian and Canadian Dollar. As they gain strength, it also means the ultimate cost of education financing will go up, due to higher exchange rates.

All major stock markets this year alone have sold off and are in negative territory. Despite recent rallies, we remain cautious in the coming months due to the uncertainty in how the crisis may evolve. Should the pandemic worsen – for example, due to a second or third wave of infections – it is entirely possible that even the US Dollar could rally at the expense of riskier currencies. This will further inflate education costs for foreign students intending to study in the United States, for example.

* “International Student Crossroads: Demand for an on-campus education amidst COVID-19” survey released on 4 May 2020 by IDP Connect, a division of international education specialists IDP Education.

 What can investors do?

Save early and invest for long-term

With lots of uncertainty facing the world, keeping a long-term perspective and staying invested through volatile times have never been as important as today. Long-term investment returns may be lower than historical levels, especially with ultra-low interest rates in several key markets, but it is vital that one starts saving and investing early for the best possible chance of achieving one’s investment goals. This will reduce the risk of missing out on recoveries typically seen after a sell-off, as evident in recent times.  Maintaining a regular savings plan or making small recurring investments can help keep a disciplined approach to investing.

Diversify, diversify, diversify

Diversification is the investment term for “not putting all your eggs in one basket”.  Often this means opting for a mix of asset classes with varying characteristics, such as stocks that may correlate with market performance or government bonds that show more resilience during a sell-off. Diversifying is critical and can be an investor’s best friend to weather market turbulence.

Asset allocations and risk appetite are also expected to shift over time, hence regular portfolio reviews are vital to ensure one’s investment plans are on track.  Tools with market data analyses and portfolio calibration algorithms can help with decision making on asset allocation, or alternatively clients can explore multi-asset funds and discretionary portfolios for investing on a more professional level.

Manage currency fluctuations by averaging-in

Making a large currency conversion in one go can lock-in the exchange rate at a single point of time. This could either work towards or against your education savings goals, and will completely depend on how the market is trending.

Instead, consider leveraging on rate-monitoring tools and pace out the conversions, for example on a monthly basis, to moderate fluctuations. Through achieving an ‘average’ rate over time, it will help mitigate any big swings in currencies and potentially moderate the cost of unfavourable exchange rates. This will be particularly useful when trading more volatile currencies.

As the world strives to flatten the virus curve, clients are encouraged to remain calm while weathering the storm. These tips also serve as a reminder that irrespective of market conditions, a careful, early and disciplined financial planning can help clear the path to achieving one’s overseas education goals.

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