Dear amazing client and friend,
Over the weekend, I took some time away to write you this article about what we are experiencing and try to explain the environment we find ourselves in and what we can do about it. We all have our own fears and difficulties during this time, having to distance ourselves from people we love, worrying about our health and our families health.
I want to help you the best I can, sharing my thoughts on what’s happening financially during this time, that may settle some of those fears so you can focus on who and what you love.
The situation
It’s hard to hide from the news that it is shouting loudly across TVs, social media platforms and radios. Repeatedly bombarding us with news regarding the coronavirus and the massive share market sell-off. For the last month, we have seen everything, from panic buying of toilet paper, to nationwide lockdowns, to mind-blowing amounts of government spending and cash rates as low as they have ever been. Quite simply the world was not prepared for an epidemic event like this. As I write this the total number of people infected by the virus is staggering, over 300,000 people infected, with over 13,000 who have passed away to the virus.
Financial panic
Financially this has caused absolute chaos, people are selling assets as quickly as they can, especially their stocks. I will never forget when this started to all unfold an elderly man stopped me in the street while talking to a colleague and he said: “I hear you talking about finances?” “Yes, we are how can I help you?” I replied. “I am a 65-year-old pensioner and my wife does not work, we have a mortgage on our house and I want to pull my super out because it’s going very quickly down and I want to take it out and put it in on my loan. Can you help me?” The statement from this man did not shock me, as unfortunately, I have seen this far too many times before. Clearly they were not prepared. No one knew this was coming, but we always knew the stock markets would turn, we just didn’t think it would be from a global pandemic. At the end of the day all good things must come to an end and after eleven years of share market growth post the Global Financial Crisis and over 400% gain on the S&P 500 over that period, we have entered a bear market and sit approximately 30% down from the height of February 19th.
The hypothetical to bring you a clearer picture
Before we tackle what to do we need to understand what is going on in the stock market now and the best way to translate this is with an asset most people understand, direct property. Let’s take a hypothetical situation, let’s say a month ago you got a valuation on your house and it was valued at $1m. Your next-door neighbours knock on your door and you invite them in. You are having a chat about their house and they mention that they are thinking about selling their house because they are scared that the area might not be a good area in a years time because they heard from a friend of a friend that the government is considering reallocating out of a prestige school zone. They proceed to say they are going to sell for $900k, even though it is the exact same house as yours. They leave, the next day your other neighbour does the same, they tell you $880k they want to sell, then the next neighbour $850k and so on until your whole Street is trying to sell with the lowest one willing to sell for $600k. Do you sell too? No one has confirmed if it is actually going to happen. Even if the re-zoning took place, what would be the result? Do you buy? This is the exact situation that is now happening on the stock market with many people rushing out the door to sell even if it means up to 70% less than it was a month ago. In the wake of this major sell-off, we have also been seeing significant buying happening and my phone has not stopped ringing from buyers. Who is right? Time will tell, but until then we will continue to see major swings every day until the dust settles and the future becomes clearer.
The portfolio impacts and how different players play the game
Many portfolios have seen significant devaluations since the global pandemic hit financial markets on 19th February 2020. All risk profiles have been affected, even the most conservative risk profiles are seeing negative growth and with cash accounts delivering less than 1%, this means to take out some fees and cash accounts are no longer producing a positive real return. Many investment managers allocate their investments for their investors differently, but to show you the effects of the Coronavirus has had in the last month I have used Australian Super to illustrate the drop in valuations across a range of their investment options and risk profiles:
As you can see from the table above, no asset classes are performing well in this current environment with performance between +0.66% to -48.95%. You will see this similar across many other investment providers, but what really is making the difference between each provider is how the underlying assets are allocated. My team and I have always closely analysed asset allocations when we are developing financial plans as they have the greatest effect on outcomes.
I know it is an old saying, “Don’t put all your eggs in one basket” or more simply “Diversify”. The concept of Diversification has been around forever but this still holds true today and regardless of the current environment, this is because as you know different assets act differently to a situation. Fund managers spend countless hours on developing asset allocations based on their information, knowledge and experience. This is why fund managers' asset allocations are important for us to analyse, they all are not the same and most importantly in the investing game not you definitely can’t judge a book by its cover. To illustrate how fund managers differ, I have included a comparison between a few investment managers to see how they diversify their assets from what they call their “Balanced option”:
Remember the old TV advertisement “Compare the pair. Same age, same income”, well as you can see if we use what advertisements tell us we would be simply comparing mainly just the name because the underlying assets are not the same. These variations in asset allocations ultimately dictate the outcome for investments options performance. Yes fees are important and accessing investments on the cheap is ideal but asset allocations hold the trump card in the investment game, as get this right, you are the winner, get it wrong and you're a loser.
Your options
Over the last few weeks, I have been inundated with the golden question “What should I do?” Well the honest answer is, this is different for everyone depending on what your situation looks like. Now that equities market valuations are down, savings accounts at historic lows and increased pressure on the property market expected, their no wonder it feels like there is nowhere to turn. So to make things a little clearer I have gone through a few different possible options that are available and some of the advantages and disadvantages of each:
These options are available but to say which one is right for you is somewhat difficult without fully understanding your current situation that you are faced with in this current environment.
In saying this, you may have heard me say this before “It’s time in the market, not timing the market”. The main reason is that no one can time the market, if they could they would not be working and they would probably be enjoying their isolation on a boat sailing in the French Riviera enjoying very expensive champagne. Below is a graph that the Morningstar research team put together which analyses the period of 1996 to 2016 on the US stock market, S&P 500. This graph explains if someone invested $10,000 over the whole period versus someone who misses out on a certain amount of the best days in an expansion recovery. Please note that this takes into consideration the Global Financial Crisis of 2008, which saw share markets tumble 55%.
Carl Richards, a well-respected behavioural finance specialist and thought leader in our financial industry sums timing the market based on emotion in a simple but effective way:
Whatever your choice, my recommendation is to fully understand your situation and the consequences of the action you take and speak to a financial adviser before making any decision.
Financial tips that will help during this time
Review and trim down on unnecessary expenses
If you haven’t already got an emergency amount of money, start with a plan to build one up.
Focus on the long game in investing, because the short game will mentality and emotionally dismantle you
Don’t feel that you need to do this on your own speak to a financial adviser, who is trained to help you during periods like this
Financially educate yourself as much as possible (reach out to me to point you in the right direction)
Quick reads
Insight: Mom and pop investors miss out on stock market gains - Written in 2012, 5 years after the start of the Global Financial Crisis. I have included this to give you a perspective of what people were thinking and saying after the biggest share market crash in history.
What Is Going on With the Stock Market? Goldman Sachs Sees the S&P 500 Dropping - Here the views from Goldman Sachs views on the US stock market and potential outcome
Lessons from the Financial Crisis - Clint Abraham of Morningstar Investments, who some have you have seen with me, put together a little article of some great investment basics
I wrote this as my team and I want to help you the best we can, investment markets and the coronavirus are something we can’t control, but what we can do is share our thoughts and insights to hopefully settle some of those fears, so you can focus on who and what you love during this time.
As always please feel free to give me a call, I will be more than happy to help.
Yours sincerely
John Cachia
Founder & Strategic Wealth Adviser
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. We do not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
This advice is, or may be, based on incomplete or inaccurate information relating to your relevant personal circumstances. We have not been able to undertake a needs analysis for you to the preferred extent because you have chosen not to provide all the personal information requested.
This lack of complete personal information limits our ability to provide recommendations that are entirely appropriate to your overall objectives, financial situation or individual needs.
Because of this, before acting on this advice, you should consider the appropriateness of the advice, having regard to your overall personal circumstances.