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  • We’ve recently seen growth investments (like shares) drop as a result of the current COVID-influenced economic downturn. This has prompted some investors to question their shareholdings, such as would they be better off just holding cash? 

  • We believe that the best approach in planning your retirement savings is to recognise that your investments are ‘long term’ and designed to be held over the course of many years, not months. Ultimately, your investment horizon will be determined by whether you are either saving for retirement, or are already in retirement and need to draw down on income in the years ahead of you.

Allow me to explain...

  • People who stay invested over a longer-term timeframe (regardless of whether they are already years into retirement or have many years until retirement), will almost invariably iron out negative return periods like we are presently experiencing. Even the damage to domestic share returns that was caused by the GFC – a once-in-a-century financial crisis – was rectified within seven years after taking account of dividends. Global shares recovered in even less time.
  • If you sell down to cash and try to time when to get back in, you almost inevitably miss out on the recovery. Timing market moves is difficult even for the world’s savviest investors. As the famous saying goes, “it’s not about timing the market, but time in the market.” We say more about this below, but want you to note that markets generally move higher over the longer term (see the chart with dark blue and red bars).
  • Staying the course should see your long term returns easily outweigh the intermittent negative episodes. By sticking to your investment strategy, you can still make tweaks to ensure you are not exposed to failing investments, while retaining ones that are temporarily devalued. In other words, don’t throw the baby out with the bath water!

But why not try and time short-term market moves? 

The temptation to do this is immense. With the benefit of hindsight many swings in markets like the tech boom and bust, the GFC and, perhaps the current COVID crisis, to some might look as though these events were reasonably “predictable”.  So perhaps it’s natural to think “why not give it a go?” by switching between say cash and shares within your super to anticipate market moves. As the yellow and blue chart shows, if you get it right you accelerate your returns (yellow bars), but if you get it wrong (blue bars) you will be left sorely disappointed. 

 Now if there is one thing that history has taught us, it’s that we have learned nothing from history. During the GFC many investors believed the bottom was going to be in October 2008 and there was a strong rally shortly afterward. But it proved to be short-lived and markets actually bottomed in March 2009. Just prior to this final leg down, many investors who had mistimed their re-entry were suffering from utter despair and were convinced markets still had much further to fall. They sold at exactly the wrong time. Indeed, even those investors who bought in at or near the bottom and enjoyed some of the rally couldn’t hold their nerve and many sold well below the top.

 In each case investors who were in it for the long term usually fared better than most who tried to time their entry and exit points…and re-entry…and so on and so forth. Of course, there are always instances of those who get the timing component right – but those are few and far between and often cannot repeat their efforts. Yes, sometimes dumb luck pays off. But we try to leave nothing to chance and have tried to position our clients portfolios for long term growth. 

Summary

  • While shares/property/infrastructure go through more periods of negative returns compared to bonds and cash, over the long term they provide higher and stronger returns in both capital growth and income yield. Therefore, it is logical that your portfolio has an exposure to them.


  • Switching to cash after a market has fallen is not the best strategy for either preserving your capital or aiding longer term growth. You will almost invariably mis-time when to re-enter your investment strategy thereby increasing the likelihood of missing out on returns. And remember that your Strategic Plan relies on a certain level of return for you to attain your retirement objectives.


  • If you look at your account balance and feel anxious or disappointed, do not let this emotional state drive your decision making. It is difficult to make sound decisions based on an emotional reaction, as opposed to the logical decisions based on your Strategic Plan. In the case of the latter, you will be calmer and more likely to remember the longer term fundamentals of your Plan and Investment strategy.

As always, if you have any questions, please do not hesitate to reach out. 

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