Today we will be exploring several important topics, each of which has been prompted by the conversations we have been having with clients this past week. My comments are aimed at helping you find some calm during these extraordinary times.
As you would know by now, most of our team are working remotely. It has proven very effective and we have remained productive. Client conversations have continued, despite our office being closed.
Update
During the past week we have seen Covid-19 impacts close-up in our communities. As our local cafes, restaurants and businesses close, we all know someone whose livelihood is being impacted. And we are all supposed to stay at home and not gather in groups of more than 2.
Global markets have gained a steadier footing in recent days. Governments and central banks have unleashed enormous stimulus to support those losing their jobs and to support credit markets. This coordinated support is critical in cushioning the impact of the C-19 economic shock.
This truly unprecedented intervention is designed to stabilise the markets. While Australia is a minnow in world-market terms, our Reserve Bank has done a superb job in stabilising credit markets so that the banking and financial systems function normally.
That said, in our view, it’s too early for excessive optimism.
Questions
As we speak with clients, we are so impressed with the relative calm displayed in what are very challenging circumstances. There have been some great questions asked by clients in the conversations we’ve had. There are four specifically we’d like to share.
Question 1 – How safe are my defensive (fixed income) assets?
Well when we invest in shares it is reasonable to expect a higher return than cash or bonds. Historically, the higher expected return has averaged about 6% per annum above the cash rate. That’s a big premium, but with the reward comes the risk of significant volatility – pretty regularly as it turns out!
While our portfolios are designed to capture this higher return, we also protect your wealth by ensuring investors have an allocation of fixed income (bonds) and cash to buffer the portfolio during periods of volatility. We call cash and bonds ‘defensive assets’ because you can rely on them when other parts of the portfolio are stressed.
For clients in retirement, (or transitioning to retirement), the security of the defensive portfolio is critical. You need it to be there during share market stress, to draw down on during the time it takes for share markets to recover.
Your security in these investments comes from four things:
Liquidity of the underlying investments – The funds we recommend manage this very carefully
Diversification – All bond funds we use are very well diversified, holding hundreds of underlying loans or bonds
Credit Risk – All loans or bonds held in the funds we use are investment grade
Term Risk – (the longer you lend money for, the greater the time for the borrower to go bust, so we use funds who manage this term risk prudently)
All four of the factors above are considered very carefully by us when we build portfolios. We never dress up unreliable fixed income products as safe, to do so would be both unprofessional and dishonest. We have always believed the “safe” part of a portfolio should be very safe; that’s why we never invest client funds in hybrid securities, collateralised debt securities, development financing loans or any other flawed loan arrangement.
In summary the credit quality, diversification and liquidity of your fixed income investments provide us with real confidence that they will continue to provide the security they were designed for.
Question 2 – Given the situation seems so unpredictable, wouldn’t I be better just moving to cash and waiting until the coast appears clear?
Last week we put together a short video on this subject.
The end of the video charts four diversified portfolios opened to investors by fund manager Vanguard in 2002. The four portfolios are contrasted with cash. Cash doesn’t suffer any decline, but over the long term it continues to be outpaced by even the most conservative portfolio. The chart movements highlight the coast is rarely clear.
The other consideration is the current and future returns of cash. Given the term ‘flattening the curve’ is so prominent right now, the compounding return of cash has flattened significantly. While shares will retain an expected return as the crisis works through, without a massive dose of inflation, cash returns are likely to remain minimal.
Our view remains consistent. If you cannot predict when market movements will occur with confidence, remaining patient and invested according to your risk tolerance is the prudent response. Every previous market downturn was reversed with investors benefiting in the long term.
Question 3 – The government is now allowing lower payments form super pension accounts, should I take up this option?
The fact is your superannuation account-based pension payment minimums have been halved until 30/06/2021.
And at present its hard to spend any money, whilst we are all confined to home.
So, our “general advice” is, if you can afford to reduce your super pension (or any other regular portfolio drawing) at this time, and still pay all your bills, then why not do so? You’ll have more in your account to spend when we are all out of “lock up”.
Question 4 – We rely heavily on Mancell Financial Group – how are you guys going?
Another great question. We have been grateful for the concern shown for our team and their families.
While our physical office is now closed, we are operating normally via a virtual office. All team members are working from home and have full functionality of resources. We are meeting all clients via video conference or phone and we thank you for your understanding as we all adapt to this new meeting environment.
To the greatest extent possible, it remains business as usual. I encourage you to call the office 6440 3555, if you need anything – Carla will refer you to the right person.
Our Financial Security – most of you will know we are a very conservatively run firm. We always remain provisioned for difficult economic conditions and our priority is to retain all team members and continue to deliver our promised services.
Suppliers – we have always taken great care to partner with suppliers we can rely on, particularly when client investments and insurers are concerned. Our key suppliers, Macquarie Bank, Dimensional Fund Advisers and Vanguard, along with the major insurers, have sophisticated business continuity plans in place. We have every confidence in these relationships.
Until next week…
Please feel free give me feedback on our communications, we really do want to be relevant to you during these difficult times. And of you can think of a question you’d like addressed (outside of reading a crystal ball), please send it in.
In the meantime, stay safe.
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.
