SMSF Portfolio Management

I am becoming increasingly cautious in the portfolio guidance for clients in the current market where very low interest rates have driven equities and property higher, faster and seemingly without any concern for lack of underlying sustainable growth in earnings.

From what I am reading and from listening to market commentators we are probably going to see the domestic, European and USA share markets thrive over the coming months but the chance of a entrancement has increased significantly for different reasons. Here it is low-interest rates driving our market and alone that is dangerous without economic growth. In the US they also have very low rates but they have a recovering economy which underpins the growth in share prices there as companies improve earnings but if the cost of servicing debt rise that will affect the share market. In Europe they have just started Quantitative Easing (money printing) so easy access to capital will spur on their share and property sectors but that may set them up for more pain in the long-term if they don’t see sustained spending and growth in their economies.

There is plenty of talk of a pull back in share markets when the US Federal Reserve starts increasing its interest rates. We probably already see the first one or two rates priced in to the market and hence the current volatility so it maybe the third or fourth rise that causes a share market pull back.

So how can a SMSF trustee prepare for a short to medium term change in market sentiment and a possible 10-20 per cent drop in markets.

1. For our clients we are retaining our long-term strategies but reviewing asset allocation. Taking the basic advice to “Sell High Buy Low” but in a gradual movement over 6-18 months. Basically banking some of the profits and re-balancing portfolios with an eye to future volatility.
2. We are dampening down return expectations: After a sustained period of decent returns post GFC we know share and property markets will revert to the mean as explained by Roger Montgomery in a recent Cuffelinks Article This is mean (-reverting that is) so we are going back to focusing clients on the outcome they were seeking such as a 6% net return in retirement funding a 5% pension drawdown.
3. Not chasing “Yield” stocks. We are spending a lot of time explaining to clients that you can lose on capital value on “blue chip yield” stocks. Most already have a decent exposure so we are just asking them to be patient and look for opportunities on the dips.
4. Educating clients that higher volatility will be the norm for a prolonged period: As global interest rates start to revert to their long-term averages this could easily trigger capital losses in the bond markets so not to be complacent about exposure to any sector even if labeled “Defensive”.
5. As Roger Montgomery mention in the article above “Cash is Ammunition” so we are recommending building cash reserves to capitalise on opportunities from market corrections. Yes rates are low but a good purchase on a dip can swing the return balance significantly in your favour. Patience!

Traditionally, May and June are statistically volatile and weak months as investors review risk exposure, do some tax loss selling as they approach the end of the financial year. There is a market adage “Sell in May and go away” which although not a certainty, does have a history to be aware of when positioning portfolios. Here is a great article by Marcus Padley from 2009 but still relevant that explains this phenomenon in good detail: Sell in May and go away.

Sell in May and Go Away

We are not suggesting exiting portfolios but we are are recommending sitting on the fence ready to buy on significant dips rather than just buying into the current market and diversification and asset allocation is key at present.

I would love to here other’s sentiments so please take the time to comment below with your own strategy, tips or critique.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

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

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