21 January 2016
Ten years ago, in another country, a man we’ll call Bill, died at 75. He left his wife, a lady we’ll call Betty, $50,000 and a house worth $350,000. Betty was 65, living on a government pension and no longer wanted the hassle of the house. So she sold it, but before leaving she asked her next-door neighbour for advice on investing the proceeds.
Her neighbour pointed Betty towards his financial advisor. Soon Betty was set up with a portfolio that paid her rent and offered her income in addition to her pension.
Then 2008 happened.
Betty’s portfolio fell by 25%. Despite her funds still doing what they were designed for – paying rent and offering additional income, Betty panicked, ignored her advisor and sold at the bottom. She dumped the remaining cash into a savings account as the country’s central bank was slashing interest rates. Within a year the central bank had cut interest rates to almost zero.
Over the next few years Betty’s money sat in the bank earning next to nothing. The funds she cashed in recovered their losses and continued to pay distributions. Betty continued to make regular withdrawals from her cash, only they were smaller as she attempted to conserve her cash. Interest rates never recovered and now Betty’s withdrawals have nearly eaten away all her cash.
We tell this story because we’re all human and can be easily frightened. Markets have had an extremely poor start to the year and the media has piled on. The biggest headline recently came with the Royal Bank of Scotland telling investors to “sell everything”.
The strategist behind the call was Andrew Roberts. Roberts suggested we were in for a global deflationary crisis and warned investors to brace for a cataclysmic year. We’re not saying Roberts and RBS are wrong, because we don’t know what comes next, but few in the media offered any perspective to the call.
In 2010, after a rough start to the year, the same Andrew Roberts was quoted in UK’s The Telegraph:
You may recall the sequel to the Great Depression never happened in 2010.
What to do about the current turmoil? It’s unknown if the share market will go down further before it goes up again, so the hardest thing to do is also the best thing to do – nothing.
Andrew Roberts’ appeal to base emotions will resonate with many people, just like 2008 spooked Betty. They’ll believe this time is different and it’s time to bury their cash in a vegemite jar. The reality is this isn’t anything new; declines like we’ve seen in 2016 are an annual occurrence. Over the past 30 years the average intra-year decline on the ASX is 12%, and in 23 of those 30 years the market still finished the year positive.
If your portfolio is well diversified then you can weather these declines. Investors drawing income can do this from cash and defensive assets and rebalance their portfolios when share markets improve.
We ensure most of our clients in drawdown phase have at least 5 years of defensive assets available so that growth assets don’t need to be sold in a downward market. For clients in the accumulation phase of their lives, it is an opportunity to buy equity assets at cheaper prices.
Accumulators and investors with longer term investment strategies can accrue additional assets at lower prices or they can simply allow some time for their asset prices to recover.
As always still feel free to contact us if you have and questions on this or any other issue.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.