How to react to this volatility as a SMSF Trustee / Investor.

The volatility over the last 6 months has been staggering but it is not unusual in historical terms as it has happened many times before. The difference now is that we are bombarded through all the forms of media with the daily movements of our investments and you just cannot ignore that weight of news. Also many people are now able to take more control of their investments via their own Self Managed Super fund or retail Master Trust / Wrap account.

It’s enough to make an anxious investor abandon shares entirely. But if you jettison equities from your portfolio in favour of cash, bonds and term deposits, it will take you much longer to reach your savings goals, and you may not get there at all.

When you look at current interest rates as being a pretty good predictor of what bonds/fixed interest will return in the future, the outlook isn’t particularly good with the 3yr bond yield hovering around 3.87% and inflation tickling the 3% band.

Likewise, interest rates from term deposits and high interest cash accounts have been dropping sharply in the last 2 weeks with 4s and 5s now in front of 6 month rates where 6s were common last month and forecasters now looking at rate cuts in October.

While short-term fluctuations in the market can be unnerving, they rarely affect long-term returns, for example investors who moved their savings into cash at the end of 2008 and stopped contributing to their superannuation accounts now have an account balance worth 20% less than investors who remained in the market.

With no end to volatility in sight, how do you keep your head while all around you are losing theirs? Here are some coping strategies:

Rebalance, Rebalance, Rebalance. Volatile markets can distort your portfolio. For example, if your goal is to have 35% of your savings in Australian equities, 20% in International Equities, 10% in property, 25% in Fixed Interest and 10% in cash, a big market meltdown could increase the amount you have in Fixed Interest and lower your allocation in equities and property.

To rebalance, you should sell some of your best-performing funds (fixed Interest, bond and cash funds) and put the money in your worst performers, something many investors lack the fortitude or commitment to do. We all know in theory what we’re supposed to do, but in reality do the opposite and flee to the best performer or cash. I know it hurts but you have to understand market cycles as opposed to “herd mentaility”. Look at Warren Buffet this week investing $5 Billion in Bank of America when most were fleeing the stock. He has a strong track record of buying when stocks are out of favour with the mainstream.

Don’t be blind to significant changes in markets like the rise of Asia or the risk of sovereign debt. Look out for changing trends like the move towards income orientated stocks. Your adviser should be pointing these matters out to you and identifying strategic asset allocations to allow for them.

How often should you rebalance? We recommend conducting regular portfolio reviews every six months, but only rebalancing when your allocation is at least 5 percentage points way from your benchmark.

Revisit you long term strategy and stick to it.  If the thought of rebalancing makes your palms sweat, consider investing your savings a “life cycle” strategy. This name for the common strategy, which has become much more popular in the last decade, invests in a mix of shares, bonds and cash and gradually become more conservative as you approach retirement. It is nothing new and most advisers will adjust your portfolio this way as part of your overall strategy but maybe you have not discussed this with them for awhile and the volatility may have led to inaction. Well now is the time to consider your future strategy and get that down in writing so you and your adviser are clear on your objectives, timelines and changing strategy over time.

Resist chasing this year’s ‘winner’ is just as likely to be next year’s ‘loser’. Even during the darkest days, some investments will shine. Lately, the flavour of the day has been gold, which is up considerably this year vs. a decline of almost 9% for the All Ordinaries.

The rise of exchange traded funds and similar products in the past few years has made it easier for small investors to invest in “hard” assets, such as gold and other commodities. In small doses, such investments can diversify your portfolio, but they’re easily abused. For example, while gold has been a winner this year, it’s not for the fainthearted. Factoring in inflation, it would have to reach $2,113 an ounce to reach its 1981 high of $850. That was a long time in the doldrums in between its peaks!

Have a look at the Russell Long Term Investment Returns report for more insight in to this subject.

Save more. In this uncertain world, the amount you save is one of the few things you can control. If your employer matches super contributions or you take advantage of the Government co-contribution fro you or your spouse, you’re guaranteed an investment return — something even gold can’t deliver.

If you look back at just how complicated and volatile the last 10 years have been, people who diversified and rebalanced and kept contributing are well ahead of where they were a decade ago.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Leave a comment

Let us know what you think? Have you got a question based on the article? Let me know

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: