It’s a hair-raising time for investors, with some markets plunging as much as 9% in a day, only to recover strongly the next. To make matters worse we have the uncertainty of the coronavirus, which will almost certainly get worse before it gets better. In my view, the effects will be far worse than the GFC – at least in 2008 events continued as planned, restaurants stayed open and people still travelled.
It’s different today – as I write most of the world is going into lockdown, with events and flights cancelled, and the bulk of the world’s restaurants and other eating places locked up. The multiplier effect will be horrendous – in the events space in Australia alone they are talking about 350,000 job losses.
Obviously, investors are scared, and uncertain and wondering what to do next. Should they cut their losses and go to cash, or hang in there till things improve. Having been an investor for more than 50 years, I’ve seen my share of bad times, but I am confident that eventually things will improve.
But, in the meantime, I have fallen back on the basic investment principles that have stood me in good stead for more than 50 years.
The first one is that nobody can consistently and accurately forecast what markets will do.
“The wisest man knoweth not when,” says the proverb, and so it is with shares. In fact, I have never known a single day when, on the day, it was the right time to go into the market. If the market is booming you are scared of getting in at the top; if it’s depressed, you are scared that you’ll be investing into a downward trend.
Because I accept the fact that I don’t know when tops or bottoms will occur, I tend to stay fully invested, with the proviso that I always have enough cash in the bank to supply our spending needs for the next three years, when added to our expected dividends. Sticking to this principle has been a real pain in the last week, because I have been salivating at the thought of buying at some of the low prices that have been on offer.
But I have stayed true to my principles and bought nothing. The last thing I want to do is put myself in a position where I buy shares that look cheap now, then later be forced to sell them at a loss because I’ve used up my precious cash reserves.
The next principle is that the price of a share does not necessarily reflect the value of the company. The behaviour of markets has been especially irrational in these last weeks. Just because the price of oil fell 30% (because of a spat between Russia and Saudi Arabia) some of our biggest blue-chip companies had falls of more than 8% – yet their balance sheets are still in good shape, and they should remain good long-term businesses. Investors can act in strange ways: they love to buy when the market is booming and shares are fully priced, but shy away when prices fall and the same shares are at sale prices.
Cashing out now in expectation of buying back is a very high risk strategy. Capital gains tax may take a hefty proportion of your sales proceeds if you do decide to sell, and it’s highly likely that the next bounce will catch you by surprise and leave you chasing a market that is rising again. A much better strategy is to accept that volatility is the price you pay for the flexibility and high potential of share-based investments, and simply hang in there and wait for the recovery.
I admit we are going through scary times, but having been an investor for many years I am not unduly worried. I lived through the 1974 credit squeeze, when loan finance dried up overnight, lost sleep in 1987, endured “the recession we had to have” in the early 1990s and have vivid memories of walking around the City of London in 2008 when Lehman Brothers went belly-up.
It’s impossible to say exactly when the current market turbulence will stop. However, we can be confident that the share market will eventually recover – as it always has. Good quality companies with real businesses, and sustainable earnings and dividends, will once again be sought by investors, and so they should recover well.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.
Do I think that people know how the coronavirus will play out? The answer is unequivocally no. I wouldn’t be looking to financial experts to tell me what’s going to happen next.
If you look at history, these tragedies impact people but they’re short-term health crises, not long-term financial crises. In the long term, we know the share market goes up.”
Should you be doing anything with your super? Yes. But should it be in reaction to the coronavirus? No. It should be about making sure you have the appropriate risk for your age and your risk tolerance.
Scott Pape is the Barefoot Investor. From an interview with Choice, used with permission.
It has been a challenging couple of weeks for superannuation fund members. The reality is that the pullback in markets has been sharp and has impacted member balances, on paper at least.
Overall, there remains a need to keep the current market conditions in context. For most members, while there may be a fall on paper, the only time the loss is crystallised is if you sell out. If you’re in your 20-40s, your super will stay invested for another 30 to 50 years, so it’s all about a long term plan and having the confidence to stick with it.
Older members are more likely to be in more conservative options, which have been less impacted. But, be careful if you consider switching to cash as you will be locking in the fall in performance. We suggest members talk to their fund or an adviser who they trust to help ensure any decision is aligned with a long term strategy.
In general, to reach retirement goals, you need some exposure to shares and shouldn’t get caught up in short term noise. Even members in their 50s are likely to need to rely on their super to draw down for the next 20-30 years.
Over the past 10 years, we have seen events including SARS, MERS, Swine Flu and Ebola. Markets have worked well and delivered good returns to members. Unlikely people are hoping that they had put more in cash over the past decade.
It is likely that the average balanced style option is down around 8-10% this year. However, this number is rapidly evolving and needs to be viewed in context.
- $100,000 invested at the peak of the market prior to the GFC is up around 80%.
- $100,000 invested at the depth of the GFC is up by around 121%.
- If you put $100,000 into cash at the bottom of the GFC and stayed there, your balance would now be close to $90,000 behind the median balanced fund.
Markets, and super funds members, struggle to deal with uncertainty. At the moment, this is the only thing that is certain. Long term strategy remains key to realising the long term outcomes super fund members will rely on for their retirement.
Kirby Rappell is Executive Director at SuperRatings
The rapid spread of the virus and fears over its impact on the global economy have ravaged share markets over the past three weeks. That has fed through to the performance of super funds, though perhaps not to the extent that some people might have feared.
Growth funds, which is where most Australians have their superannuation invested, hold diversified portfolios that are spread across a wide range of growth and defensive asset sectors. This diversification works to cushion the blow during periods of share market weakness. So while Australian and international shares are down at least 27% since the end of January, the median growth fund’s loss has been limited to about 13%. This is still a material reduction in account balances, but it comes on the back of the tremendous run funds have had since the end of the GFC. From the GFC low point in early 2009 to the end of January 2020, the median growth fund averaged a staggering 9.3% per annum – well ahead of the typical long-term return objective of 5.5% to 6% per annum. The current sell-off has obviously eaten into that long-term average gain, but funds are still performing well ahead of their objectives since the end of the GFC.
The key message to super members is not to take panic measures they might regret later. It’s too early to tell what the full economic impact of the virus will be, and trying to time markets now is a very risky proposition. The negative returns we’ve seen in recent weeks are ‘unrealised’ losses, so you don’t actually lock them in unless you take your money out to switch to a lower risk option. If you do that, then not only do you turn those paper losses into real ones, but you also miss out on the market rebound which will come sooner or later.
Even in the case of older members, most don’t take out all their super when they retire so their money remains in the pension phase often longer after retirement. So we encourage everyone to remember that superannuation is a long-term investment, and if the investment option you are in suited you two months ago then it is most likely the one to stick with now.
Mano Mohankumar is Senior Investment Research Manager at Chant West
Although a rapidly-spreading global pandemic hasn’t been experienced by most of us before, we are no strangers to the market’s reaction to this type of global bear market event. In the last 100 years there have been probably about 10 such events.
Shares contain a ‘risk premium’ – the extra return available over cash for taking the risk; the fact is that without volatility the share market wouldn’t work the way it does – many forget that. They also forget that it doesn’t last forever – the duration of global bear markets has ranged from 6 months and 3 years.
So investment-wise, focus on what’s within your control. Your options boil down to three camps:
- Get out of the market entirely,
- Put more into the market now, or
- Stick with the plan.
If your plan was constructed with full knowledge of how the capital markets behave then this event ought already to be factored into your plan. The first two options pretty much means not having a plan at all, just reacting to events which, when it comes to money, is dangerous. Your best bet is to go consult someone who can help you formulate one – the best time to have a good plan is yesterday… the second best time is right now.
Daniel Brammall is President of the Profession of Independent Financial Advisers