AMP’s chief economist provides some tips for thinking about your money and what to do with it.
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.
How are your investments coping during the COVID-19 pandemic?
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