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Sometimes it is true that you don't know what you've got.  ​Till it's gone.  Music aficionados will recognise that line from Joni Mitchell's 1970s hit Big Yellow Taxi.

         

There will be many lessons we learn from the COVID-19 pandemic and its impact on our lives and our investment portfolios.

Few people will view risk – be it to their health or their investments – through the same lens again.

Rewind to the early days of a bright new year in January. The notion of a global pandemic that would infect more than 7 million people and result in more than 400,000 deaths (to date) and shut down large parts of the economy would have belonged firmly in the realm of Hollywood disaster movies rather than something you or your super fund had reason to worry about.

Liquidity is one of those things that investors – both professional and individual – can take for granted particularly after an extended period of relatively strong growth in investment markets and in Australia's case, no economic recession for 29 years.

Times of severe market disruption effectively stress test portfolios and their need for liquidity.

Large superannuation funds have been part of the public debate on liquidity in part because of their need to rebalance portfolios affected by the drop in market values but also because of the wide-ranging package of support measures initiated by the Federal Government that included varying the criteria for early access to super up to $20,000.

But it is not just large super funds that will be rethinking their approach to liquidity. Self-managed super funds also need to factor in the need for liquidity – particularly when they are approaching or indeed are already in the drawdown or pension phase.

Superannuation, by its nature and design, is a long-term investment. So liquidity can be traded off to a degree when the funds will not be needed to be drawn down for 30 or 40 years. Accordingly, for those SMSF trustees in their 30s or 40s liquidity is more an opportunity than a risk.

However, if you are approaching retirement the situation shifts significantly. The purpose of super is to provide the income to fund or supplement your lifestyle once the regular paycheck has stopped.

How you manage your funds' liquidity is always important but becomes critical when you hit the pension years because it is your responsibility as the trustee of your SMSF to be able to pay expenses of the fund and benefits to members as required. The liquidity challenge for an SMSF that is invested in one illiquid asset such as property can be dramatic when things do not go to plan.

There are a variety of strategies that specialist SMSF advisers deploy based on an individual's circumstances. But there are a number of risk areas for SMSFs in particular those with concentrated direct property portfolios.

Last year the Australian Tax Office sent letters to 18,000 trustees of SMSFs asking about the diversification within the fund's portfolio – the letter was sent to funds that had more than 90 per cent of their fund's assets in a single asset class – typically a property.

The ATO was not saying you could not invest everything in the one asset class – it just wanted trustees to be sure they understood the risks – particularly if limited recourse borrowing was involved – on return, volatility and liquidity and a properly considered investment strategy.

At the time there was commentary around whether it was a proper role for the ATO to ask such a question; for trustees that heeded the warning about the risks of lack of diversification and the potential liquidity risk it was prescient indeed.

An iteration of this article was first published in The Age on 13 May 2020.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
19 May 2020
vanguardinvestments.com.au

 

There's an old saying, to only focus on the things in life that you can control.

         

But that adage has been well and truly stress tested on just about every level over the past few months because of the uncontrollable events stemming from the COVID-19 pandemic.

On an investment portfolio management level particularly, it's been difficult if not impossible to have much control amid the wild daily fluctuations in the values of many financial securities.

And, on a household level, the repercussions arising from lockdown restrictions and widespread business closures are that many families are now experiencing unprecedented financial strain because of a sudden loss of regular employment income, investment income, or both.

Of course, we all still have some elements of life control and maybe the current conditions are an opportunity to reflect on our investments goals to see if they still make sense and are realistic.

Depending on your circumstances, which may have necessitated impromptu investment actions during the crisis – such as the withdrawal of some superannuation funds or the selling of other financial assets – some goal adjustments may be prudent.

Last week, we referred to the Australian Tax Office now requiring SMSF trustees to not only review their investment strategies regularly, but to justify them.

The same sort of investment review also makes sense outside of the superannuation sphere.

Revisit your investment framework

Regardless of where and how you invest, creating clear financial goals is one of the fundamental pillars for having the best chance of achieving investment success.

Your goals should be well defined and as realistic as possible based on your current financial situation. If circumstances change, it makes sense to review them.

A review needs to take into account your immediate financial needs, and how they may impact your longer-term financial objectives.

Any adjustments will need to take into account factors such as your age, how your household income-earning capacity is likely to change over the short and medium term, and cater for revised expectations on investment returns over the longer-term.

Ideally, investment goals should always have a long-term focus and be designed to endure through changing financial environments over time, including periodic downturns in equity and property markets.

They should also take into account the potential for loss of income over time, which can be partially mitigated through appropriate personal insurance coverage.

Allowing for market risks

The current events have highlighted that investment risks are ever-present, and that when major value corrections do occur on markets they are usually widely unexpected.

In setting investment goals, it's important both to understand that risk is a key factor in investment returns and to build in your own tolerance for risk.

Market risks and potential returns are generally related, in the desire for higher returns will invariably require taking on greater exposure to market risk.

A current example of this is in the fixed interest market, where investors with a higher-risk tolerance have invested into bond issues from companies with low-quality credit ratings (see Know your bonds, they're not all the same). The investment temptation has been the issuers' high income payments, however recent events have seen a large number of these companies default on their debt repayments.

Other key aspects in setting and reviewing goals is your investment time horizon, liquidity requirements, tax obligations, legal issues, or unique factors such as a desire to avoid certain investments entirely. Constraints can change over time, and should be closely monitored.

The danger of lacking a plan

Without an investment plan, it can be easy to lose sight of the bigger picture and to end up with a portfolio that's not well balanced across different asset classes.

As a result your portfolio may wind up being concentrated in a certain market sector (see Over-concentration risk comes to the fore), or it may have so many holdings that oversight of your portfolio becomes onerous.

Most often, investors are led into such situations by common, avoidable mistakes such as performance-chasing, market-timing, or reacting to market “noise.”

Many investors—both individuals and institutions—are moved to action by the performance of the broad equity market, increasing equities exposure during bull markets and reducing it during bear markets. Such “buy high, sell low” behaviour is evident in managed fund cash flows that mirror what appears to be an emotional response—fear or greed—rather than a rational one.

Stay focused on your goals

A sound investment plan can help you to avoid such behaviour, because it demonstrates the purpose and value of asset allocation, diversification, and rebalancing. It also helps you to stay focused on your intended contribution and spending rates.

Vanguard believes investors should employ their time and effort up front, on the plan, rather than in ongoing evaluation of each new idea that hits the headlines. This simple step can pay off tremendously in helping you stay on the path toward your financial goals.

Being realistic is essential to this process. You need to recognise your constraints and understand the level of risk you are able to accept.

In reviewing your investment goals, don't underestimate the importance of professional financial advice (find out about Quality financial advice in our Plain Talk library).

A financial adviser can help in developing a framework around your long-term goals and financial capabilities, which can be reviewed regularly over time.

 

 

 

Tony Kaye
Personal Finance Writer
12 May 2020
vanguardinvestments.com.au

 

The government’s introduction of the Retirement Income Covenant scheduled to start on 1 July has been deferred to allow continued consultation and legislative drafting to take place following the coronavirus crisis.

         

In a statement, Assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume said the deferral will also allow drafting of this measure to be informed by the Retirement Income Review.

The revised date will be determined following further consultation on the Covenant.

Ms Hume said the purpose of the Retirement Income Covenant is to establish an additional obligation for trustees to formulate a retirement income strategy for their members.

“We’ve been working for some time on a Retirement Income Covenant. While efficient accumulation is imperative and we are steadily chipping away at the inefficiencies of that part of the system, we need to build a smoother transition from the accumulation to the de-accumulation phase,” Ms Hume said.

“Of course, there is nothing stopping funds and their trustees from developing retirement income strategies now, and we’d encourage them to do so. Trustees don’t need to wait for us to legislate the Covenant.”

 

 

Adrian Flores
25 May 2020
smsfadviser.com

 

In the past few weeks, we have seen economies be brought to a standstill by COVID-19, unprecedented social measures announced by governments around the world, and a new, unusual rhythm of living that many of us are still settling into.

         

In the past few weeks, we have seen economies be brought to a standstill by COVID-19, unprecedented social measures announced by governments around the world, and a new, unusual rhythm of living that many of us are still settling into.

Although it might feel like things are calming down a little as markets begin to seesaw with less extremity, it's still the case that uncertainty ahead is likely to be the only constant. Even for the most measured of investors, staying the course in such times can be challenging, and perhaps particularly so for those who have retired.

You may have read in the news that many investors are “buying the dip” and taking advantage of trading opportunities caused by the volatility, with the view that share prices will eventually rise again. But for many in retirement, the first instinct is not to capitalise, but to protect. And advice to stay the course, while important, can feel a little off base when your super fund's portfolio has dropped sharply and you are starting to feel a bit helpless.

Here are three options to consider if you're in the retiree camp.

Reassess your asset allocation

Staying the course doesn't necessarily mean do nothing. More practically, it means sticking to your investment plan but periodically re-evaluating your asset mix to ensure it's still aligned to your goals, time frame and appetite for risk.

In light of all this volatility, perhaps you are now realising your tolerance for market risk is not as high as you previously thought – or you were comfortable but hadn't got around to updating/reviewing since you retired. In a severe market event like this you want to avoid trading in response to market moves and locking in losses. But it does make sense to revaluate your risk tolerance and consider how to rebalance your portfolio and lean towards fixed income products. One way to do this can be to redirect your investment distributions to conservative fixed income funds so you can build up the defensive portion of your portfolio over time.

Rethink discretionary spending

Reducing spending where possible goes without saying during difficult times but nobody would label it an ideal solution. But while you can't control the market nor predict its movements, your discretionary spending is however a factor that you can adjust.

For example, let's say your portfolio was valued at $950,000 at the beginning of the year.

Assuming a six per cent average annual return throughout retirement, you estimate you have a total amount of $4,750 to spend a month. If all other factors remain the same but your portfolio balance declines by 25% (to $712,500), your estimated monthly income drops by almost $1,200 a month (to about $3560).

For the time being, tightening your belt slightly in step with your reduced portfolio balance might help ease financial stress and help navigate through the crisis.

Relay concerns to a trusted adviser

The value of a good financial adviser often shines most brightly during periods of market uncertainty. When you're not sure what best to do, advisers can offer guidance and support that's tailored to your individual circumstances.

According to some research Vanguard recently conducted into the value of financial advice, it was noted that instead of purely focusing on portfolio and financial value, it is also worth assessing the value advisers can bring from an emotional standpoint.

Peace of mind can't be quantified in dollar terms but it is perhaps just as important as the figure on your portfolio statement. A second, professional opinion can calm your nerves or boost your confidence during these unsettling times. And if you're feeling particularly affected by the last few weeks, it might also help you readopt the right mindset to make considered investment decisions for your future.

Staying the course isn't always as easy as it sounds, but by keeping emotions in check and focusing on the factors you can control, you might weather this storm better than you think.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
15 April 2020
vanguardinvestments.com.au

 

 

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