We recognise that we are in the midst of a humanitarian crisis that is of deep concern to all of us – both professionally and personally. We also realise that during this time of severe market volatility, you may have questions about your investments and what actions to take given the extreme uncertainty ahead. These periods of volatility can be unnerving even for the most experienced of investors.
As a result of the coronavirus taking hold, coupled with other market events over the past weeks, we have been keeping up with the developing situation by having discussions with various fund managers and research houses to help us understand this rapidly developing situation and the potential ramifications to help us determine an appropriate course of action. As you can imagine we ignore headlines and tabloids and rely on credible information from a variety of respected research and information content providers we trust, such as Macquarie, Morningstar and Lonsec (to name just a few).
As the coronavirus outbreak is still in its early stages, we anticipate that markets might decline further before things begin to improve. Our firm’s beliefs are underpinned by the history that investment sentiment eventually turns around, of course no one can predict when and how. Below we have summarised our position based on the available information:
Superannuation retirement portfolios
During times of rapid declines, retirement portfolios are of great concern as these can be affected the most by declining markets with no incoming cash to prop up portfolios. However, at KT Associates we plan for such market moves and are comfortable that our client’s portfolios contain sufficient levels of cash to sustain pension payments without having to sell out of growth investments. This strategy provides a buffer to help the growth portion of the portfolio to recover, and reduces the probability of us having to sell growth investments at low levels to fund pension payments.
Whilst your balance may be reduced, you benefit because you are still making payments (contributions) into your super fund and effectively buying additional units at much lower prices. In many cases we expect balances to rebound and assets bought at lower prices to appreciate in future years. For you to cash in these growth assets at this point while the market is exhibiting this drop in prices would not make sense given that you do not need access to the capital right now. That is unless this volatility is causing you significant anxiety, in which case we may need to rethink the entire strategy as these events are all part of the market cycle.
It appears now that the coronavirus is expected to impact global economic growth which might lead to a global recession or a recession in some countries. Therefore the probability is that it is likely to get worse before it gets better. Having said that, there is no way of knowing with certainty how much lower the market may fall, if indeed it will fall further and how long it will take to rebound. If you cash in your portfolio now, it will be difficult to time the market recovery and you may not recover losses. Everyone is equally impacted from the smallest of portfolios to the largest industry super funds.
It is at times like these that a financial adviser can offer the greatest value to you. At KT Associates we are here to help you understand all of this, put this into perspective, provide you with more information, answer your questions, address your concerns and ensure you stay the course to meet you long term, life long goals and objectives. We firmly believe investors who abandon their well-considered, long-term financial plan rather than staying the course through a recovery, could cause themselves lasting harm.
Behavioural economists and psychologists have shown that people, even experts in their field, have poor track records of making proper assessments in times of uncertainty. There are three ways we quickly assess the probability of an outcome. All of these are susceptible to flaws. An understanding of these can help investors better assess periods of uncertainty and thus lead to better decisions in uncertain environments.
It’s important to look past the positive and negative commentary and concentrate on your long term goals. Assess risks, understand the data, without emotion or haste. Often we are ignoring probabilities relevant to our decision. The chance of rate cuts, which impacts prices, is changing hourly. In markets, unpredictability is the only constant. Successful long-term investors survive short-term falls by sticking to investment principles that have withstood the tests of time. For portfolios, this may include better diversification. For equities, investing in profitable companies with strong balance sheets and stable earnings has historically given resilience to portfolios.
Finally from one of the many economists… “As the virus peaks and fear dissipates we think equities will look attractive. Valuations look reasonable (and pockets of exceptional value), interest rates will be low (meaning there remains little alternative) and stimulus is likely to accelerate. How far are we from this point? It is hard to tell given we are reliant on emotion easing. However, the speed of the pullback will encourage regulators to accelerate stimulus. ”