When markets become volatile, it’s normal for investors to react. Emotions can lead to actions that might feel decisive but can be detrimental to your retirement plans.
“Retirees and those approaching retirement should consider staying the course with their strategy and avoid the noise” says Daniel Cheung, Head of Advice at EISS Super.
“A lot of people are asking ‘Should I change anything? Will this impact my plans for retiring? Should I be doing anything different?’” explained Daniel.
“Just because you’re retiring or retired it doesn’t mean your money’s retiring. For most people, their money in superannuation still needs to be invested and working for them for the rest of their life.”
If a part of your investment portfolio is experiencing a downturn, that doesn’t mean it’s time to throw your whole strategy out of the window and start again.
An effective financial plan will focus on your short and long-term needs and goals and accommodate market fluctuations. That’s why EISS Super’s investment options are diversified, meaning you are also holding assets within other asset classes that may have performed better than shares recently, such as Cash, Fixed Interest and Alternative assets.
“If you have a financial planner and a strong strategy in place, you’d know that markets experience downturns often.”
Shifting into cash now might sound like a move to restrict risk, but it carries other risks with it, including inflation and interest rate risks.
“When people react to market volatility, most will miss the rebound and lock in the loss,” said Daniel. “And then they have to decide when they’re going to buy back in, which is difficult to time, and most do this after the market has already rebounded. So, it’s a double whammy.”
It doesn’t mean that you shouldn’t consider making some adjustments if your budget has experienced some significant changes.
For starters, your entertainment spending has probably stopped dramatically over the last two months and will increase gradually over the next few. And any international travel plans are also on hold. However, electricity, gas, internet and water bills will likely have increased since you’re spending more time at home.
Also, interest rates have dropped to their lowest levels and this has probably reduced your cash interest income and possibly any mortgage interest.
If you use an income stream like a transition to retirement or account based pension, you should consider taking advantage of the Government’s reduced pension drawdown limits, which have been halved. This allows more of your money to remain invested and gain the benefits of recovering markets.
“If you still need some money to cover your expenses, some members are looking at drawing on other capital alternatives” said Daniel.
“Consider using other investments you have, like surplus savings or term deposits, instead of selling down growth assets and locking in a loss.” This is something each person needs to consider whether it is right for them, which they should do with the assistance of a qualified financial planner to see what other options they have.
If you’re invested in a few different funds and believe share markets are going to recover in the next 12 to 24 months, you should consider drawing from your cash options. This will give share markets, and your growth funds, time to recover.
If all your superannuation is in one of the diversified options, such as the Balanced fund, this rebalancing between cash and shares is already happening. As share markets fall, most fund managers increase their holdings in equities to bring them back to their stated benchmarks. This means they're buying more units at cheaper prices. So, you can probably sit tight.
“If you have spare money or cash flow, now is a good time to consider investing in fundamentally good investments that are at deflated prices. It’s an opportunity people are starting to see.”
The right steps for you will depend on your unique financial situation, your total portfolio of investments, how confident you feel with taking risks and your goals. It’s not a one size fits all approach and shouldn’t be about overreacting.
With the end of the financial year here, this is always a good time to re-evaluate your strategy and risk profile.
“If you’re retired, or getting close to retirement, it’s always a good time to ask ‘Is that investment still right for me? Is it time to take less risk or perhaps a good time to use this opportunity to invest in good assets at cheaper prices?’ regardless of the Coronavirus,” said Daniel. “You should regularly review your investment strategy, especially if you’re in a default investment option.”
Early in your retirement isn’t always the right time to go for a riskless investment strategy.
“Even when you retire, your investments still need to be invested for the long-term. If you recently retired or are looking to retire tomorrow, you still have a 20 to 25-year life expectancy. That’s a long time to be invested which means it’s ok to hold growth assets like shares as they have time to grow or recover with market corrections.”
Like many financial analysts, Daniel is optimistic about a recovery.
“As long as you’re holding fundamentally good investments, they will recover. We’ve had many good years of over performance, so expect some bad times. The thing to remember is on average when considering the ups and downs, your money is still working hard and producing much stronger returns compared to cash alternatives.
“Make sure you’re invested in line with your risk profile, your funds are aligned to your goals, and just stay on the journey,” he concluded.
Of course, all these views do not take into account your personal circumstances, and you shouldn’t rely on just this information. You need to review your own situation and talk to a financial planner before making any major changes to your strategy. Keeping you focused on your long-term goals is their role and being on the market roller coaster is part of the journey.
If you’d like to talk with a Financial Planner about your super, please call us on 1300 369 901, Monday to Friday from 8am to 8pm (AEST).
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