Seven things for investors to keep in mind during the crisis

AMP’s chief economist provides some tips for thinking about your money and what to do with it.

australian ten dollar note with a coronavirus mask

Share markets and superannuation balances have continued to take some massive hits as the coronavirus crisis worsens, but what should you do with your money at this time?

According to AMP Capital’s chief economist, Shane Oliver, the market is going through a number of corrections and now is not the time to panic.

He explained that there are seven important things investors need to remember when they are assessing the current situation.

Corrections are normal
While we are all worried about our health and finances during this troubling time, and headlines are screaming about the billions lost from the share market, Dr Oliver explains that this is a normal part of the investment cycle.

“Corrections in share markets of the order of five per cent, 15 per cent and even 20 per cent are healthy and normal,” explains Dr Oliver.

“For example, during the tech/dot-com boom from 1995 to early 2000, the US share market had seven pullbacks greater than five per cent, ranging from six per cent up to 19 per cent, with an average decline of 10 per cent. During the same period, the Australian share market had eight pullbacks ranging from five per cent to 16 per cent, with an average fall of eight per cent. All against a backdrop of strong returns every year.

“More recently, the Australian share market had a 10 per cent pullback in 2012, an 11 per cent fall in 2013 (the taper tantrum), an eight per cent fall in 2014, a 20 per cent fall between April 2015 and February 2016, a seven per cent fall early in 2018, a 14 per cent fall between August and December 2018 and a seven per cent fall into August last year. And this has all been in the context of a gradual rising trend.

“While they can be painful, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.”

A deep bear market is unlikely
We don’t know whether the current situation will lead to a recession or not.

Dr Oliver doesn’t believe that a recession is inevitable and that is important.

“We have not seen the excesses – in terms of overall debt growth (although housing debt is a source of risk in Australia), overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia,” Dr Oliver explained. “And we have not seen the sort of monetary tightening that leads into recession. In fact, monetary conditions remain very easy.

“However, the uncertainty around the coronavirus outbreak and the likelihood of economic shutdowns designed to contain it … suggest a greater than normal risk on this front.

“That said, even if there were a recession, growth would likely rebound quickly once the virus came under control as economic activity sprang back to normal helped by policy stimulus.”

Selling shares locks in a loss
You might be tempted to sell to avoid further losses from your portfolio, but this is the sometimes the worst thing you can do.

“Selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss,” explained Dr Oliver.

“With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering.”

Pullbacks provide opportunities
According to The Simpsons, the Chinese use the same word for crisis as they do for opportunity.

That might not be the most reliable source of translation information, but the fact remains that crises do provide chances to take significant advantage.

“When shares and growth assets fall, they are cheaper and offer higher long-term return prospects,” Dr Oliver explained.

“So, the key is to look for opportunities the pullback provides – shares are cheaper and some more than others.”

Dividends are smoother
While shares have taken a significant hit, the size of that hit won’t necessarily be reflected in the dividends that are paid, according to Dr Oliver.

“Companies like to smooth their dividends over time – they never go up as much as earnings in the good times and so rarely fall as much in the bad times,” he said.

“So, the income flow you are receiving from a well-diversified portfolio of shares is likely to remain attractive, particularly against bank deposits.”

Buck the crowd
When everyone else starts to feel really negative about the direction of the market, this is usually the bottoming out point.

Warren Buffet’s famous advice to ‘be fearful when others are greedy and greedy when others are fearful’, has never been more true.

Turn down the noise
“Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks and views,” Dr Oliver says. “But we are rarely told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market.

“All of this makes it harder to stick to an appropriate long-term strategy, let alone see the opportunities that are thrown up. So, best to turn down the noise.”

Read more at AMP Capital.

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    COMMENTS

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    Jem
    26th Mar 2020
    3:50pm
    My Wife has a Superannuation account with MLC, she recently wished to transfer her Account to another fund, but was told there would be a Brokerage fee? Are they allowed to charge this? I feel it’s a cover up for the now abandoned Exit fees they could charge....
    I have contacted the Super Ombudsman who couldn’t help, contacted the ACC who couldn’t help but suggested I contact a local Community Law Practice, they couldn’t and wouldn’t help, only Divorce advice etc.....Is this charge allowed folks? My wife has emailed MLC twice, but no response....
    Tanker
    26th Mar 2020
    4:46pm
    Welcome to the world of Capitalism where any sort of control on this type of thing is frowned upon by Governments of the Right of Centre as we currently have in Australia.
    Tanker
    26th Mar 2020
    4:46pm
    Welcome to the world of Capitalism where any sort of control on this type of thing is frowned upon by Governments of the Right of Centre as we currently have in Australia.
    Circum
    26th Mar 2020
    6:54pm
    Hi Jem.I am surprised the Ombudsman couldn't help you.There is no brokerage fee payable.Superannuation funds try to discourage people switching funds as they lose an income source.Suggest you ask the fund that you wish to transfer to ,to arrange the transfer for you.Thats what normally happens.
    Circum
    26th Mar 2020
    6:54pm
    Hi Jem.I am surprised the Ombudsman couldn't help you.There is no brokerage fee payable.Superannuation funds try to discourage people switching funds as they lose an income source.Suggest you ask the fund that you wish to transfer to ,to arrange the transfer for you.Thats what normally happens.
    panos
    26th Mar 2020
    5:54pm
    wait till it hits the bottom and buy buy buy buy......................make a motza
    Ahjay
    26th Mar 2020
    7:34pm
    Probably less than 1 in a hundred EXPERTS could predict the bottom. I am buying once a month until I run out of cash. I won't beat the market but I will equal it by buying low cost index funds. Then it's time to sit back and collect the dividends. Which stocks are winners are of no consequence, and over time the market always wins.
    Jem
    26th Mar 2020
    7:40pm
    Thankyou Circum, yes Ombudsman suggested I contact the ACC, that’s the only help they were prepared to give! Woeful...We had planned to get the other fund to transfer her funds...But were shocked to be told that, so we will see what happens and yes, thought that they might be trying to stall her decision to move...
    Golden Oldie
    26th Mar 2020
    9:06pm
    I received AMP shares on the de-mutualisation of AMP. I held them as I was still workingg, not too worried about the price until recently when I set up a trading account. Since the start, the dividends were reasonable, but the price has been going down for 20 odd years. Several corrections during that time, including the GFC, hoped the shares would recover a bit. Then the Royal Commission, 24 cent dividend dropped to 4c cents, and then stopped completely, so I got disgusted with their performance, and sold for less than $2. Since then it has dropped further. Sometimes it pays to sell.
    Chris B T
    26th Mar 2020
    9:25pm
    The comment about Dividends, maybe you are talking about prior to this Oddity that is upon the Share Market.
    Several Companies have stated that there will be none, others halving as well as some saying they could fold.
    So where is the "blending" all I can see is these Companies will need the Cash to survive or you end up losing the lot so little or no dividends for the time being.
    maelcolium
    26th Mar 2020
    10:10pm
    No wonder AMP are in a world of pain taking advice from this economist. In case there is any doubt, we are already in recession. Seen the people waiting at Centrelink? Iron ore production which has kept the country afloat is taking a hit with forward orders from China all but dried up. Global supply chains are grinding to a halt as Governments shut down sections of the global economy. Government has shut down until August. The share market has lost a third of it's value. What more evidence do we need?
    The next quarters statistics will add to the panic. Their very existence will be determined by whether they can offload their insurance arm and that doesn't look good as there are no takers willing to pay what they want. The sale will give them some breathing space but the pandemic will finish off many businesses and those too weak to generate long term profits. AMP are cooked and probably be absorbed in a fire sale. I'm all cash. Anyone waiting for the share market to correct is living in a hopeless dream.
    johnp
    27th Mar 2020
    2:49pm
    Obviously ignore Shane Oliver - he is part of AMP !!

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    2:28am
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    6th May 2020
    1:38pm
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    3rd Jul 2020
    3:16am
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