Its been a tough couple of weeks on investment markets. Fears about the impact of CVID-19 (or the much better sounding Coronavirus) are weighing heavily on sentiment, and as we speak International and Australian Markets have declined in value by more than 10%. The media is full of reports about the drastic impact this is going to have on people’s superannuation balances, as if people weren’t scared enough by the thought of infection and death, now it seems the virus is eating away at their money!
We need to take a deep breath and remember a few things:
1. 10,000 people died in Australia last year from the flu
2. Investment markets will always have times of turbulence, some are easily attributable to a single factor, most are not
3. Markets cannot and do not always go up
4. For all those selling out of markets now, someone is buying (For a video on this subject click here)
5. We had approaching 20 percent returns last year (remember that?) and prior to the latest events, we had nearly 10 percent return since 1 January (in two months!)
The simple fact is that we have no idea what the long-term ramifications are, but we can be sure that this will not be the last market downturn we all experience.
As financial planners, we always take our clients through an assessment of their attitude to risk. Risk in the way that we think about it is not clearly understood by many people. At times like these we often hear some say that they want to get out of investment markets because they are too “risky”. To be clear, markets are no more or less risky today than they were last year when we experienced such stellar performance. When investing to achieve more than the guaranteed rate of return offered by Cash (1.6% p.a. anyone?) we always need to take on a level of risk. Our advice is to only take on the level of risk required to achieve your desired outcome, and only that amount of risk with which you feel comfortable. If you are not comfortable with the required level of risk, then you should be prepared to accept a somewhat lesser outcome.
There is a fundamental difference between risk and uncertainty. When we talk about risk in financial planning terms we’re talking about deviations from an expected return within known boundaries. That’s a fancy way of saying we expect markets will produce long-term expected rates of return, but that sometimes they may deviate, either on the positive or negative side, within a range which we can have a reasonable level of confidence. The amount of risk we can accept is a measure of the amount of that deviation which we can tolerate whilst being able to sleep at night.
Uncertainty is an entirely different beast, and is probably what most people are thinking about when they talk about risk. Can I predict the future with any degree of certainty? – No!. Will the markets go up or down tomorrow? – I have no idea. I can predict with absolute certainty that someone sometime (probably on the television) will say “This time its different” just like they did all the other times, like the GFC, or when Brexit was going down, or when Trump got elected. In all of those cases (and I predict this one) markets went down, people got scared, some panicked and sold out, and eventually things returned to normal.
When thinking about how all of this impacts upon you and your investments, I urge you to think of these three things:
1. You don’t eat your superannuation balance. If you are in your 40s or younger, I predict there will be at least two more events like this one before you can touch your super. Even when you are retired, provided your super can continue to pay you the income you need to live the life you want, short term movements in the value of the balance you have left are irrelevant, unless of course you withdraw the balance at a low point in which case you have just reduced the size of the pie.
2. If your investment portfolio is appropriately constructed it will deliver returns over the long term commensurate with the amount of risk you are prepared to accept. In a year like the last one, you are creating a buffer against shocks like the one we are experiencing now.
3. Timing markets is fraught with danger, either on the upside or the downside. No one can predict whether you are paying too much or too little for an investment at any point in time.
Anyone reading this who wants a chat with a calmer voice than the one inside their head is welcome to give me a call