Managing investment risk in uncertain times

text: managing investment risk in uncertain times

This year has exposed investors to the end of a bull market and the start of a global recession, all caused by a totally unexpected global pandemic. The outlook for the global economy and investment markets remains uncertain until an effective vaccine is available.

While there is cause for optimism that one of the many vaccines will become available in the not-too-distant future, the road to financial recovery – for nations and many individuals – could be much longer.

Whether you are working towards major financial goals such as buying a home, planning to retire soon, or already retired and looking for reliable income, it’s never been more important to come to terms with uncertainty and manage investment risk.

So how can investors not only survive, but thrive, during this difficult period? Staying the course isn’t easy when you can’t see what lies ahead, but you need to strap yourself in if you want to achieve long-term financial success.

Stay the course

When markets fall sharply, as the sharemarket did earlier this year, it’s tempting to switch to cash investments. All too often, this can mean you lock in your losses at or near the bottom of the market and potentially miss out on the recovery that follows.

After hitting a record high in February, the ASX 200 fell almost 37% by mid-March as the economic impacts of COVID-19 began to sink in. Then against expectations, the market rebounded 35% over the next three months.i

Throughout that period, volatility was high with dips of a few percent one day followed by an equally sharp rise the next. But history has shown that it generally pays to ignore the noise.

There have been many studies about the impact of missing out on the best days for a market over a given period. Missing even a few of these days can have a big impact on your long-term returns.

Looking at the Australian market, a hypothetical $10,000 invested in the ASX 200 Accumulation Index (share prices plus dividends) on 30 October 2003 would have turned into $37,735 by 6 September 2020. Missing the 10 best days would have reduced returns by $15,375, while missing the 20 best days would have reduced returns by $22,930.ii

Manage investment risks

While it’s important to stay invested, that doesn’t mean you should forever sit on your hands and do nothing.

Booming markets can make investors complacent, so a market correction is often a good opportunity to stress test your investments to see if they are appropriate for risk tolerance and personal circumstances.

For example, if you’re in your super fund’s growth option but this year’s roller-coaster markets have kept you awake at night, then perhaps a more conservation option would be more appropriate.

Or if your portfolio has become unbalanced after all the market upheaval, with too much reliance on one asset class or market sector, then you might think about rebalancing your portfolio to plug any gaps.

Investors who are nearing retirement or recently retired may have a greater focus on preserving capital, to provide more certainty that their money won’t run out.

The importance of diversification

Even retirees need to balance their need for capital preservation with capital growth, which is another way of saying they still need to diversify their investments.

By diversifying across and within asset classes, you have the best chance of riding out a big fall in any one asset class. With interest rates close to zero and likely to stay low for some time, investments such as bonds and cash that traditionally provide capital protection with regular income will be hard-pressed to keep pace with inflation.

By including some growth assets such as shares and property in your portfolio, your savings will continue to grow over the long term even as you draw down income to cover your living expenses. Shares and property also provide income in the form of dividends and rent, which retirees can use to diversify their sources of income.

Whatever your age and stage of life, avoiding knee jerk reactions, managing risk and diversification can help you navigate these uncertain times. If you would like to discuss your investment strategy with a financial adviser, please get in touch on 03 5120 1400.

https://www.asx.com.au/prices/charting/index.html
ii https://www.fidelity.com.au/learning-hub/markets/timing-the-market/

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

The Economic Stimulus Package

Maintaining confidence, supporting investment, keeping people employed

By now you’re probably aware that the Federal Government has “announced” a $17.6 billion stimulus package. One designed to “protect the economy by maintaining confidence, supporting investment and keeping people in jobs”.

If you’re wondering what that might mean for you, here’s a brief guide to the four major components of the package.i

Payments to lower-income households

Post-GFC, the Rudd Government sent $900 cheques to adult Australians earning less than $80,000.ii The Morrison Government is doing something similar by providing Newstart recipients, age pensioners and veterans a one-off payment of $750. These payments will start flowing into the bank accounts of 6.5 million (mainly) lower-income Australians from March 31. While most working Australians won’t receive this payment, this type of tightly targeted payment will provide maximum bang for buck in terms of stimulating the economy. 

Cashflow assistance to business

Business owners and their employees have also been well-catered for in the stimulus package. 

Small and medium-sized businesses that employ staff and have a turnover of less than $50 million will be eligible for tax-free payments of between $2000-$25,000. It’s estimated this “Boosting Cash Flow for Employers” measure will benefit 690,000 businesses that collectively employ 7.8 million people. Given there’s a $25,000 ceiling on the payment regardless of the size of a business’s workforce, it’s a measure that will benefit smaller businesses much more than medium-sized ones.iii

Business owners who employ apprentices and trainees are also eligible to apply to have the Government pay half their wage for the first nine months of 2020. It’s estimated this measure will assist 70,000 business and 117,000 apprentices and trainees. 

While it’s a separate initiative, the Government’s provision of modest financial support for casual workers who contract Coronavirus will directly benefit those casual workers and indirectly benefit their employers. Without this payment to casuals, employers might have, for instance, had to worry about infected staff turning up to work out of financial desperation.iv

Support for business investment

The government is loosening the criteria around the instant asset write-off. Pre-Coronavirus, businesses with a turnover of up to $50 million could instantly write-off the purchase of assets costing up to $30,000. Post-Coronavirus, businesses with a turnover of up to $500 million can write off asset purchases of up to $150,000. 

On top of this, the Government has also accelerated depreciation deductions for the next 15 months. Up until June 30, 2021, businesses turning over less than $500 million will be able to deduct 50 per cent of the cost of any eligible asset the moment it’s installed. It’s predicted these two tweaks to the investment rules could benefit up to 3.5 million businesses that collectively employ almost 10 million Australians. 

Assistance for regional Australians

Regional Australia, already laid low by drought and bushfires, will be disproportionately impacted by Coronavirus. Many regional economies are dependent on the industries – tourism, education and agriculture – most affected by the pandemic. It’s yet to provide much detail, but the Government has promised to spend $1 billion propping up the nation’s regional economies. 

The end of the beginning

There’s broad agreement the Government’s stimulus package has been well-designed and will reduce the chance of Australia slipping into its first recession in three decades. But with share markets across the globe increasingly volatile and countries closing their borders, Australia is in unchartered territory and there may well be further changes to Australia’s economic policy settings in months to come. 

If you have any queries in relation to how the above measures may apply to your circumstances, please do not hesitate to contact our office. 

i Unless otherwise end noted, all the facts, figures and claims in this article come from the CommSec Economic Stimulus Package document 

ii https://finance.nine.com.au/personal-finance/900-cash-bonus-who-gets-it/facdc354-9a48-4e9e-850c-2bb8705dbe29 

iii https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Assistance_for_businesses.pdf 

iv https://www.smh.com.au/politics/federal/casual-workers-face-wait-up-to-13-weeks-for-coronavirus-payment-20200312-p549cj.html

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.



Steering through choppy seas

Like it or not, we live in interesting times. More than a decade after the Global Financial Crisis, the global economy is facing fresh headwinds creating uncertainty for policy makers and investors alike.

This time around it’s not a debt crisis, although debt levels are extremely high, but geopolitical instability.

The ongoing US-China trade war and Brexit confusion in Europe have increased market uncertainty and volatility and put a spoke in the wheel of global growth. The Organisation for Economic Co-operation and Development (OECD) forecasts global economic growth to ease to 3.3 per cent over 2019. It expects Australia to grow at 2.7 per cent.i

Against this backdrop, there has even been speculation that the Reserve Bank may need to resort to “unconventional measures” such as negative interest rates and quantitative easing to boost growth. These measures have been widely used overseas but are foreign concepts to most Australians. So what are they?

Why negative rates?

Negative interest rates have been a feature of the global financial landscape since the GFC, in Japan and in Europe. European central banks charged banks to hold their deposits, encouraging them to lend out cash instead to kick start economic activity.

So far, the Reserve Bank hasn’t followed suit, but we are edging closer. The cash rate is at a record low of 0.75 per cent with further cuts expected.

Most economists think the Reserve Bank is unlikely to take rates below zero. Taking interest rates too low could run the risk of igniting another property boom.

If negative rates are off the table, another way to bankroll economic growth is quantitative easing.

What is quantitative easing?

In the aftermath of the GFC, central banks in the US, Japan and Europe printed money to buy government bonds and other assets. By pumping cash into the system they hoped to boost economic activity.

There has been much debate about whether quantitative easing worked as intended. What it did do was push investors into higher-risk assets such as shares and property in pursuit of better returns.

It has also increased global public and private debt to $200 trillion, or 225 per cent of global GDP. Until now, high debt levels have been supported by high asset prices. But when coupled with geopolitical and trade tensions, debt adds to the downward pressure on growth.ii

The slowdown in economic growth in Australia and elsewhere is reflected in falling bond rates. In recent times more than 10 European governments have issued bonds with negative interest rates.ii

In recent months, yields on Australian government 3-year and 10-year bonds have dipped below 1 per cent, an indication that the market expects growth to slow over the next decade.

What does this mean for me?

It seems more than likely that bank deposit rates will stay low for some time. That means investors seeking yield will continue to look to property and shares with sustainable dividends. But it may not be plain sailing.

Trade wars, Brexit, high asset prices and slowing economic growth are creating a great deal of uncertainty. Each new twist and turn in trade talks sends markets up in relief or down in disappointment.

After a decade of positive returns, and average annual returns of 7 per cent from their superannuation funds, investors may need to trim their expectations.

Time to plan ahead

If retirement is still a long way off, you can afford to ride out short-term market fluctuations. Even so, it’s important to make sure you are comfortable with the level of risk in your portfolio.

If you are close to retirement or already there, you need to have enough cash to fund your pension needs without having to sell assets during a period of market weakness. For the balance of your portfolio, you need a mix of investments that will allow you to sleep at night but still provide growth for the decades ahead. When markets recover, you want to catch the upswing.

Successful investing requires patience but also adaptability. If you would like to discuss your overall portfolio in the light of market developments, give us a call on 03 5120 1400.

i https://www.imf.org/en/Publications/WEO/Issues/2019/10/01/world-economic-outlook-october-2019

ii https://www.smh.com.au/politics/federal/200-trillion-in-global-debt-at-risk-if-trust-falters-oecd-20190909-p52pdr.html

iii https://www.ricewarner.com/can-super-funds-continue-to-meet-their-investment-targets/

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

Is the tide turning for property?

For the first time in years, the planets seem to be aligning for homebuyers and property investors. Interest rates are falling, property prices largely appear to be stabilising and constraints on bank mortgage lending have been relaxed.

It’s welcome news for first homebuyers and anyone who has been waiting on the sidelines for a signal that the downturn in house prices could be at or near the bottom in key markets such as Melbourne and Sydney.

As is always the case though with the national housing market, the full story is more than a tale of two cities.

House price slide losing momentum

According to research group CoreLogic, in the year to July the national housing market fell 6.4 per cent. This fall was driven by the two biggest markets Sydney (down 9.0 per cent) and Melbourne (down 8.2 per cent). 

Perth, still coming down from the peak of the mining boom, and Darwin suffered similar declines. Brisbane fell 2.4 per cent and Adelaide was down 0.8 per cent from a much lower peak. Hobart (up 2.8 per cent) and Canberra (up 1.1 per cent) were the only capital cities to rise in the year to July. 

But in the aftermath of the May federal election and the first of the Reserve Bank’s two recent interest rate cuts, the downhill slide in prices began to lose momentum. 

In July, home values recorded zero growth nationally, with signs the housing conditions are stabilising. Most tellingly, prices rose slightly for the second month in a row in both Sydney (up 0.2 per cent) and Melbourne (up 0.2 per cent). However the stabilisation in housing values is becoming more broadly based with Brisbane, Hobart and Darwin also recording rises in values. i 

Reserve Bank opens the bidding

In hindsight, the Reserve Bank’s recent decision to cut interest rates for the first time since 2016 could mark the beginning of the end of the downturn in home prices. 

In June, the Reserve Bank lowered the cash rate from 1.5 per cent to a new historic low 1.25 per cent and followed up in July with another cut to 1 per cent. 

Mortgage interest rates are also low by historic standards. In early July, the average standard variable mortgage rates of the big four banks were all around 4.9 per cent. The best available rates from smaller lenders are now below 3 per cent. ii 

Banking regulator joins in

The Australian Prudential Regulatory Authority (APRA) is also doing its bit to breathe new life into the property market. 

In July, the banking regulator scrapped a rule that required banks to assess new mortgage customers on their ability to manage repayments with 7.25 per cent interest rates no matter what their actual rate might be. 

APRA will now require banks to test if borrowers can manage repayments at least 2.5 percentage points above a loan’s current rate. With many mortgage rates for new customers currently around 3.5 per cent, this would mean banks would have to test whether customers could afford repayments of 6 per cent instead of 7.25 per cent. iii 

As a result, comparison website RateCity estimates someone earning the average wage ($83,455) could see their borrowing power increase by $66,000 to $544,000. iv 

Property investing beyond houses

Australians’ love affair with bricks and mortar is legendary, but there is more than one way to profit from property. 

If you’re thinking of buying as an investment, rather than as a place to call home, there may be opportunities to invest directly in commercial property or via a managed fund. 

Listed property trusts, property ETFs (exchange traded funds) and traditional unlisted managed funds offer a way to invest in a diversified portfolio of properties in Australia and overseas. As well as residential property they can invest in retail, office and industrial property. 

If you would like to discuss your property investment strategy in light of recent developments, give us a call. 

i All house price data from Core Logic, 1 July 2019, https://www.corelogic.com.au/sites/default/files/2019-07/CoreLogic%20home%20value%20index%20JULY%202019%20FINAL.pdf 

ii The Sun Herald, 1 August 2019, https://www.corelogic.com.au/sites/default/files/2019-08/CoreLogic%20home%20value%20index%20AUGUST%20FINAL.pdf 

iii APRA, 5 July 2019, https://www.apra.gov.au/media-centre/media-releases/apra-finalises-amendments-guidance-residential-mortgage-lending 

iv RateCity, 5 July 2019, https://www.ratecity.com.au/home-loans/mortgage-news/apra-changes-average-aussie-family-can-now-borrow-60k

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 or RGM Finance Brokers Pty Ltd ABN 81 330 778 236 (RGM) that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.