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.

Making peace with the unknown

Life constantly challenges us with unknowns, yet some of these hit closer to home and harder than others in their impact.

The coronavirus is unprecedented in our lifetimes, so we are charting new territory in the world’s response to this crisis. The uncertainty around its far-reaching impact is creating fear for many around the globe, as governments act to minimise the spread of the virus.

Due to the fast changing nature of the government response to this momentous challenge, there are significant unknowns. There are short term unknowns around the government’s evolving response to the crisis and you could be concerned about the stability of your work situation. And longer term about how will this impact you into the future? Perhaps you’re wondering when you will be able to retire as your super balance takes a dive? Will the economy and businesses survive the disruption? How will you be supported through this period?

You are not alone in experiencing these fears. As humans we like to deal with ‘knowns’ and plan accordingly, rather than be at the mercy of uncertainty and instability. Whether it’s something as big as the coronavirus or a smaller unknown, there are however ways we can become more comfortable with uncertainty.

Planning for the unknowns

Planning for the unknowns sounds like a contradiction. After all, if we don’t know how, when and if we will be impacted, how can we plan for it? Yet planning for potential outcomes can help us feel more in control and be one less worry to deal with.

You don’t need to think of every possible eventuality, but given the challenges society is facing, consider what the implications mean for you and your family. What can you do to minimise the impact?

Then the next, possibly more challenging thing to do, is to accept that you can’t plan for all eventualities and acknowledge that there may be some things out of your control. Focus your attention on what you are able to have some control over and then look at narrowing the list down to what really matters most to you, letting the rest of the ‘noise’ dissipate.

Stay positive and engender connection

The situation is changing rapidly and it’s tempting to constantly monitor news feeds, as it can feel more empowering to feel like you know what is going on. Just be mindful of taking breaks from the updates if they are fuelling feelings of uncertainty. Step outside and enjoy a little fresh air, call a friend or just do something small that gives you a bit of a breather and a little perspective.

The societal impact of the coronavirus is huge and is having a significant impact effect on many of our lives. It’s important to remember that these changes aren’t necessarily permanent and that we are all in this together.

Connection is important in helping us feel grounded and supported during a period of uncertainty. This crisis is first and foremost a health and human crisis, so we need to be respectful of not only our own health, but those of others. We can help those who are more vulnerable. There are many good news stories arising of people assisting and connecting with their neighbours and those in need.

Understanding the impact on the markets

Markets have experienced a significant downward trend as the impact of the coronavirus continues to develop across the globe. This has had a significant impact on investments and more broadly on superannuation account balances.

While it is understandable to feel unsettled, consider your long term financial goals. Avoid making rash decisions based on fear, as this can crystallise your losses and put you on the sidelines for when the market recovers and as history shows, it always does.

Especially during this period of uncertainty, I hope you are keeping well and looking after yourself. We are here for you every step of the way. Don’t hesitate to get in touch with your adviser if you need assistance.

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.

Hold on…volatility ahead

After period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19). We are seeing significant falls as well as rallies as the markets react to what measures policy makers are taking to provide economic support and soften the impact of the coronavirus.

Markets move in cycles, at times like this it’s good to get some perspective.

Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years.i After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely.

The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.

Avoid knee-jerk reactions

At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a “safer”, more conservative option in your superannuation fund.

While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.

It’s near impossible to time the market, particularly at the present moment with a volatile market that is responding to a situation that is changing on a daily basis. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines as the market recovers. As history tells us it always does.

In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to resist making fear-based decisions and focus on your investment horizon.

Have a plan

Investing is a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to knee-jerk into decisions that may not be the best in the longer term.

Your plan needs to take into consideration your unique situation, financial goals and your comfort with risk.

Low risk comes with lower returns

Many people are wary of investing in shares because of the risks of the kind of market event we are currently experiencing. Growth assets such as shares and property do entail higher risk but they also deliver higher returns in the long run than cash in the bank.

While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.

Spread your risk

Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.

A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t sink your ship.

The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance.

A disciplined approach

Rather than sell shares in quality companies in a panic, continue to collect your share dividends which may be more attractive at present than the returns available from cash and some fixed interest investments. It may even be worth considering reinvesting dividends in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.

When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss or review your overall investment strategy, don’t hesitate to get in touch with an adviser on 03 5120 1400.

i https://www.chantwest.com.au/resources/2019-a-standout-year-for-super-funds

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.






Expand your horizons with ETFs and LICs

One of the golden rules of investing is diversification, but that can be difficult to achieve when you are just starting out or have limited funds to tap into a world of opportunities. Which is why investors have been flocking to exchange-traded funds (ETFs) and listed investment companies (LICs).

ETFs and LICs are like managed funds in that your money is pooled with other investors to create a large portfolio of assets which is professionally managed. Not only do they provide diversification, but they can be bought and sold on the Australian Securities Exchange (ASX) as easily as shares and have lower fees than traditional managed funds.

In the six years to July, the market value of LICs has more than doubled from $16 billion to almost $34 billion. In the past year alone there have been 11 new listings, taking the total to 101.i ETFs have also grown strongly. There are now 212 exchange traded products (ETPs) on the ASX, including ETFs. From a standing start 15 years ago, ETFs have a market value today of about $31 billion.ii

Yet despite their popularity, there is confusion about the technical differences between these products.

What are LICs and ETFs?

LICs are the great grandfathers of the listed managed investment scene, with a history going back almost 100 years. Trailblazers such as the Australian Foundation Investment Company (AFIC) and Argo Investments have provided investors with steady returns for decades, mostly from a portfolio of Australian shares selected by the fund manager.

While Australian shares still account for 83 per cent of total LIC assets, these days 16 per cent are in global equites through well-known fund managers such as Platinum. Newer LICs also offer exposure to micro-caps, infrastructure, private equity and absolute return funds.

By contrast, ETFs invest in a basket of shares or other investments that generally track the performance of a market index. You can buy an ETF to give you exposure to an entire market, region or market sector such as global health or technology stocks. They also offer investments in a wider range of asset classes, from local and international shares to bonds, commodities, currency, listed property and cash.

Structure and tax

As the name suggests, LICs use a company structure while ETFs are unit trusts.

Like other companies, LICs are governed by the Corporations Act. They pay company tax on their income and realised capital gains which they can hold onto or pay out as dividends plus any franking credits. Investors are then liable for tax at their marginal rate.

ETFs pass on all tax obligations to investors. Despite these differences, the after-tax position for investors is similar to LICs.

Another key difference is that LICs are closed-ended investments, which means they have a fixed number of shares on issue. This structure means they tend to trade at a premium or discount to the value of their net tangible assets (NTA) because the market determines the share price, not the value of the company’s underlying assets.

ETFs are open-ended which means units in the fund can be created or redeemed according to investor demand without the share price being affected. As a result, ETFs trade close to their NTA.

Why now?

The growing interest in LICs and ETFs can be traced back to the growth in self-managed super funds (SMSFs). SMSF investors are keen to keep investment costs down and constantly on the lookout for simple, effective ways to create a diversified portfolio tailored to their personal needs.

LICs were also given a shot in the arm following a change in the Corporations Act in 2010 that allowed them to pay regular franked dividends.

It’s important to understand how different investment vehicles work and whether they are appropriate for your personal circumstances and appetite for risk. If you would like to discuss your investment strategy, give us a call on 03 5120 1400 and speak to a Financial Adviser.

i ASX Investment Products Monthly Update August 2017

ii BetaShares Australian ETF Review August 2017

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.




Summer 2020 Edition of Insights and Investment Solutions

This edition contains the following articles:

  • Market update
  • Having the money talk with your partner
  • Downsizing – do you want fries with that?

If you wish to discuss any financial matters, please don’t hesitate to contact us on 03 5120 1400 to make an appointment and speak to an adviser.

Please feel free to share the Summer edition with your connections on social media – see Share This Article.

Click here to download the Summer 2020 edition

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