By all – or at least many – accounts, Australia’s short-term economic future looks grim. All working generations will already be feeling the pain fiscally. But let’s not envy retirees, or those nearing retirement, who have some heady financial decisions to make about their immediate futures.
We asked our members in the YourLifeChoices Investing in your future NOW 2022 survey what were their biggest concerns on the road to financial security in retirement.
Unsurprisingly, the most common responses revolved around navigating the current economic climate. Learning more about where to put their money now to ensure a better future was also high on the list. So, too, the financial outlook for the rest of 2022 and the years ahead.
We asked BetaShares chief economist David Bassanese for his tips to help you secure your nest egg. Few people in Australia are better equipped to offer guidance in these troubling times – especially when it comes to investment.
What is your outlook on markets for the rest of the year?
The nearer-term outlook for equity markets appears challenging, given the backdrop of slowing global growth and still stubbornly high inflation. My concern is that earnings growth expectations need to be cut further and equity valuations have moved back to elevated levels. The major upside risk, however, is a quick decline in inflation – perhaps due to an expansion in global oil supplies and lower energy prices.
Can you share your thoughts on portfolio construction for retirees looking to preserve their capital given the market conditions?
The key thought is that timing markets is especially difficult. The single best strategy is for investors to have a mix of growth and defensive assets. This will provide an overall level of expected return and short-run volatility. Being able to ‘sleep at night’ reduces the risk of panicky moves in the face of market volatility. It also reduces the risk of getting carried away in frothy markets, and taking on too much risk.
That said, the good news for retirees looking to preserve capital is that central bank interest rate increases over the past year have improved the prospective returns from usually low volatility fixed-income markets. Government bonds are now offering healthy positive yields compared to near-zero yields only a year ago.
Are exchange-traded funds (ETFs) still the best way to go in today’s volatile markets?
ETFs don’t promise and were not necessarily designed to offer better returns in volatile markets. They simply provide diversified, low-cost, easy access to major asset classes and investment themes.
One major advantage of ETFs in periods of market volatility – especially compared to listed investment companies (LICs) – is that investors may sell down their investments at near ‘net-asset value’ (or the underlying market value of the securities held by the ETF). In the case of LICs during periods of market volatility, investors may often be forced to sell at prices well below net-asset value.
Compared to many active managed funds – and expensive hedge funds – ETFs also tend to offer good transparency. Investors can see at any point in time exactly what securities are held within the fund. ETFs usually also tend to invest in very liquid markets – such as equities and bonds. So, investors should be able to buy into and sell out of ETFs in large numbers over time without much trouble.
ETFs also offer good protection, as the assets of the fund are held separately to that of the fund manager. In the unlikely event that a major ETF provider could get into financial difficulty, investor assets within an ETF should not be affected and will still be available to investors.
How do bonds fit into an investor’s SMSF in the current financial circumstances?
Notwithstanding the unusual sell-off in bonds so far this year, they should still be considered useful in any well-diversified portfolio. Over time, bond returns tend to be less volatile than equity returns and usually – but not always – are negatively correlated with equity returns. This is due to periods of rising interest rates (which hurt bonds) that are usually good periods for economic growth and share market returns, and vice versa.
The past year has been unusual in that we had a strong unexpected upturn in inflation. This caused central banks to raise interest rates quickly from low levels, at a time when equity markets valuations were also elevated. The sharp rise in interest rates therefore hurt both bond and equity returns at the same time. Going forward, and as economic growth slows, we may see weaker returns from equities but stronger returns from bonds over the coming year. This means bonds will return to exhibiting the negative correlation with equity returns.
Will defensive stocks still be the way to invest for the rest of 2022 into 2023?
As I suspect equity markets will remain under pressure over the next three to six months at least, defensive stocks – such as healthcare, consumer staples and utility companies – are likely to hold up relatively better.
BetaShares is a YourLifeChoices preferred partner and a leading Australian fund manager specialising in ETFs and other ASX funds. BetaShares also offers cost-effective, simple and liquid access to the broadest range of ETF investment solutions available on the ASX.
Do you have a question for David? Feel free to send it to newsletters@yourlifechoices.com.au or share it in the comments section below.
Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without considering your objectives, financial situation or needs. It has been prepared with due care, but no guarantees are provided for the ongoing accuracy or relevance. Before deciding based on this information, you should consider its appropriateness regarding your own circumstances. You should seek professional advice from a financial planner, lawyer, or tax agent in relation to any aspects that affect your financial and legal circumstances.
