Coronavirus and Your Superannuation
Friday 13 March 20
We do live in interesting times. Investing in toilet paper and sneezing into your elbow are ideas that most of us never considered before. By the way, the tissue issue isn’t a big deal – I was able to buy a 16 roll pack this morning, and I’ll forgive my wife for the $20 she spent at the petrol station for a couple of small packs. Coughing or sneezing into a tissue or your elbow, however, is good practice!
While we have fun joking about toilet paper, what’s happening to our superannuation and other investments is a big deal. The question is, should we be worried?
- For those with cash to invest, or are still in the accumulation phase, this is a great opportunity. You can get into the market at 2018 prices.
- For those who are in the pension phase, this is a time to manage where you are drawing funds from to minimise the damage.
- For all of us, as our Prime Minister has told us, this is a temporary event, and while we don’t know how long it will last, there will be a recovery on the other side.
How to manage the dip:
A year ago we felt that markets were getting overpriced and that there were many potential risk events on the horizon, so we moved our clients into slightly more conservative portfolios. There was a bit of a dip last August, but we felt it wasn’t the correction that we were expecting, so we held our ground. For a while there it seemed like we were idiots, especially as markets hit record highs. But we finally got our correction, and a fair bit more!
The plan is to sometime soon move into more aggressive portfolios – ones that suit the clients’ risk appetite. The net effect is to reduce the downside movement and increase the upside movement, while staying invested and not missing out on growth that takes place overall.
In the Global Financial Crisis, the people that lost out big time were the ones who cashed out near the bottom of the dip. Since we never know where the bottom is until well after it’s recovered, doing any sort of cashing out on the way down is dangerous. Those who stay invested experience a bit of tummy displacement as they go through the roller coaster ride, but it comes popping up on the other side.
What are the markets doing?
At the top of this blog is a chart for the Australian all-ordinaries index as of the close of the market yesterday. You can subtract another 6% or so for today. The rest of the world is doing similar things.
The size of the drop is big, but you can see that even since the GFC we have had others of similar magnitude, at least to this point. But the steepness is unique, and that isn’t comfortable. It’s happening for two reasons: 1) the market was overpriced and needed a correction to bring it down to real values, and 2) COVID 19 is having, and will continue to have a material impact on the short-term profitability of companies, and there are significant cash flow management risks to businesses. Add to that the emotion that goes along with it, and that produces a big impact.
Governments around the world realise that there is genuine risk to their economies with what is going on, and they are taking it seriously. Stimulus measures are being rolled out rapidly. Industries at risk are receiving support. And I trust that you are supporting your family and friends – it might be time to start handing out some of the dozens of packs of toilet paper that you have stashed in your garage!
We are currently preparing advice for our clients with regard to the next changes to make to their investments, but it’s still not quite time to make that move. We will be in touch at the appropriate time.