There is a lot going on in investment markets this year and we have provided a question and answer format discussion below.
The short version however is that the oil price war and corona virus (COVID-19) has impacted markets which had lifted strongly in 2019. We have seen significant losses over the last week or so with the US and Australian Share Market index down significantly.
Investment managers should be using the market weakness to take advantage of good investment opportunities. It is also important to remember that we have chosen prudent managers who only own high quality assets with good management, that are attractively priced, which means they are designed to fall less than the broader market in times like these.
For most, this won’t require a change in strategy, given you are investing for the long term and some will be able to take advantage of this weakness. Investing is one part of the strategic guidance that we provide our clients. A great deal of what we do is around cash flow, debt management, tax planning, wealth protection, and the lifestyle choices we all face, which should mean that your personal financial affairs remain in order, and give you clarity about the road map to achieve a wonderful life.
If you are concerned and want to discuss this, please rest assure we are here and able to chat through your thoughts, feelings and strategy to ensure it remains appropriate.
We have been here before.
Whilst many of you were clients of the business prior to the GFC there are a number of clients who have engaged with us in more recent years. We know that along the journey, clients become much more aware and conscious of their investment decisions. Whilst this is a vitally important in the long term, it certainly provides a heightened level of interest/ anxiety at times like this when all the headlines are screaming about massive losses and impending doom.
So whilst we hope the following commentary is useful, of course don’t hesitate to call our office to talk with or arrange a meeting with us. We are here to help you navigate times like this and it is a great opportunity to recheck that the decisions we have made together still feel right.
For those of you who were conscious investors throughout the global financial crisis you, have understood the context of the discussions we have had with you recently around how much risk you take with your money to benefit from higher returns, and where we have chosen not to take risk to minimise the impact of market falls.
Should we sell now and buy back in when the market has bottomed?
Without a doubt when markets are falling we wish we were sitting in cash and when markets are rising we wish we were fully invested. No one has a crystal ball and the longer investment professionals are around, the more humble they become because history shows that no one is able to time the market with perfection or even enough consistency.
Whilst the US and Australian share market indexes have fallen, the recovery prices can be quick. (This was also the case recently with the Sydney and Melbourne property markets). This highlights one of the big issues with selling out and being in cash, which is that you may never be able to buy back in at that price again and are then forced to pay more when you eventually decide that you just have to invest again.
There have been investment professionals saying ever since the GFC that we should not own anything other than cash because there was going to be a bigger crash than the GFC. Those people who followed that philosophy have missed out on the fabulous returns of the last 10 years. All this means that most clients should never be 100% sitting in cash if they are investing for the long term. The process we work through with you as clients is how much should be invested in shares and property markets, and how much should be invested more conservatively.
If we don’t sell and don’t have cash to buy then are we missing out on the opportunity?
Where we talk of no changes being required in a portfolio it is important however to realise that there will be a lot of change happening within the specialist funds charged with the day-to-day investment decisions for your money. We have deliberately chosen to use active managers who constantly monitor the opportunities and make decisions to invest in a high-quality selection of businesses or assets and avoid the multitude of businesses and assets that are either poor quality or overpriced. Depending on the opportunities and the outlook these funds may choose to invest conservatively by investing into more stable investments or businesses and hold high levels of cash.
Platinum investment Management in its recent fund update explained it was only 69% net invested at the end of February is a case in point, as they have considerable opportunity to take advantage of opportunities. They are positioned to take advantage of great opportunities such as we are in now to use that cash to buy at discount prices. Also at times like this there are wonderful companies that they would like to own but which have been overpriced so they can now sell those more conservative or defensive assets and rotate into those better opportunities at appropriate prices. This can also be summarised as rotation within the portfolio.
During the GFC when we were advising working clients who felt they did not have spare money to invest into those buying opportunities, one of the things we would highlight was that they still had their super contributions going into superannuation. They still had their investment income to reinvest or being used to compliment other strategies like debt repayment. That meant that they had actually invested significantly into their future, reducing risks, and having the ability to capture the investment opportunities, despite feeling they had no money to play with.
What are the positives in this situation?
There are also a number of clients who we have been running more conservative strategies and waiting for an opportunity and so you will be now wondering at what point we start buying. That of course is the question that needs a crystal ball to answer.
We do believe that the falls so far represent a good buying opportunity however markets could fall further in coming weeks or months. The regular market fluctuations illustrate why growth assets do require long time frames, and this is one consideration that we would want to discuss.
Most people have been following the corona virus enough to realise the experts are now predicting that the peak of the pandemic in Australia may be sometime around August or September so you may be wondering are the investment markets going to fall and continue falling between now and then. The thing to be aware of in that regard is that the share markets are very forward looking. The markets generally sell down well before the economic shocks has impacted company earnings or property rent and have generally started recovering well before the recovery in company profits and rent actually occurs. So it’s quite possible that the current sell off has priced in the impact of the corona virus related economic slowdown so markets may travel sideways from this point or even gradually trend up.
However it is also possible that the secondary impacts of the corona virus related economic slowdown will trigger issues that lead to a bigger correction. For example the news this weekend of the battle of power with the major energy produces which has resulted in the collapse of the oil-price is raising concerns of highly indebted oil companies and countries defaulting on their debt agreements, and this could cause a flow over or contagion within debt markets which could have long-term ramifications for the share markets.
I’m retired and rely on my invested assets for our income. What should we be doing?
For retirees who during the GFC not only didn’t have extra money to invest into the markets but were also relying on drawing down their capital and spending their investment income the concern is greater however it is for this reason that we run the bucket concept and have between one and three years worth of income requirements sitting in defensive assets.
This means you are not forced sellers at depressed prices in order to continue enjoying life and this gives prices time to stabilise and recover.
And once again even for our retirees there will be a lot of rotation within the managed funds and the diversified multi-asset funds as they rotate away from defensive assets and into the better growth prospect opportunities.
Your spending behaviour doesn’t necessarily have to change yet either, as we have generally determined the appropriate spending rate with you using assumptions that factor in periodic sell offs in the market and this year the petrol prices may make that holidaying that bit cheaper.
The headlines each night fill me with dread!
During the GFC we also spent considerable time coaching people to ignore the sensationalist headlines in the press. We need to remember that the press is rewarded by for their sensationalist journalism by increased reader rates and click throughs. Their mandate is not to encourage good behaviour within investors through the provision of balanced information. Whilst it is very hard in this connected world to tune out of the noise, our longer term clients do this very well and report that their quality of life is better for it.
Whilst we hope the above was useful, don’t hesitate to call our office to talk with or arrange a meeting with us. Please don’t sit and stew if you have thoughts or feelings that we should discuss and act on, as no one knows your needs and requirements as well as you do.
If you are interested in further reading we link in the following blogs from other periods of weakness.
This first one was written in February 2018.
Or this from January 2016
Note: In this blog, we have used some terms that could be confusing to some readers. To assist with this issue, in some cases we have provided a hyperlink using the blue text to a relevant article or site to give some more context or explanation. By hyperlinking we find we don’t need to get into too much detail in the blog which keeps it shorter. We hope this makes sense, but we welcome your feedback.
The information and articles as well as the blogs provided on this page are general information/advice only and are not personal advice. The information/advice does not take into account any personal objectives, needs and situations of any individual/s as such prior to making any decisions regarding your investment strategy or acquiring a financial product, you should seek personal financial advice from an authorised adviser. The appropriateness of the information/advice should be considered on an individual basis and advice sought as to suitability. Past performance is not a reliable indicator of future performance.
Bennett Wealth Group Pty Ltd – ABN 28 142 752 234 is a Corporate Authorised Representative No. 348491 of Bennett Financial Services Pty Ltd ABN 26 142 752 225, holder of AFSL / ACL No. 357917.