Author: Michelle Griffiths, Partner, TAG Financial Services
With COVID-19 forcing many new changes and updates in various areas of our finances, I have had many clients left with an uncertainty over their excess cash and low interest rates and what is the best approach moving forward.
It is completely understandable that people (particularly retirees) are frustrated with the low interest rates particularly when they may be relying on this income to put food on the table. Here are some insights on this topic and how we are talking to our clients;
Cash is King
With the volatility of the markets over the last 6 months it is important to have a clear understanding of your needs for the short and medium term and preserve your cash for these needs. If you have a settlement on a property (for example) coming up in 6 months time then it is not worth risking your cash holdings to try to seek out an additional 3% interest rate and potentially risk losing some of the capital that you have invested if the markets move the wrong way in the short term– how will you settle on the property now?
Looking into the crystal ball
I can tell you mine is a bit cloudy – but what I can make out for now is that there are a lot of risk areas coming our way that will create some turmoil in the markets over the coming months. Some of these include:
- Australian business – businesses have been propped up by the government stimulus packages. Many of these are due to expire or reduce at the end of September 2020. How many businesses will be able to continue to trade once these assistance packages are switched off? With so many businesses in financial stress now it is reasonable to predict that this is not going to be a good picture. Some people have suggested that many of these businesses are not on the stock exchange and won’t affect the markets. This is possible, but they are the lifeblood of the Australian economy and this will absolutely affect everyone.
- Property market – there is a lot of scare mongering about how much the property market is likely to suffer. I am already hearing stories about kids moving back home with their parents because they can’t afford their rent anymore on their reduced wages. Tenants asking for rent reductions is also quite common – and essentially depends on the occupation and employment nature of the tenants. So, there will be some that will be affected significantly and some that won’t be affected much at all.
- International markets – as well as the COVID-19 situation around the world we also have a US election process well underway and they will go to the polls in early November 2020. Why does this impact us? Well, think of the old adage, if the US sneezes we catch a cold. This is still true to a large extent and they do influence markets generally – and markets tend to dislike uncertainty. Recall the situation where the markets improved in the US as soon as the election result was known 4 years ago. Oddly, it has less to do with who is elected than the fact there is no longer uncertainty. The bottom line is that there is some uncertainty ahead on this front (Kanye West for president?) and this will have a potentially negative impact on the markets.
Watch for sharks
There are predators out there so guard yourself. If you are being offered a 10% rate of return on a loan account or bank account then this is not a normal bank account or term deposit. You need to be careful and know what you are investing in and the risks you are taking (who remembers the people who lost their money in the Pyramid Building Society back in 1990 – offered interest rates of 5% higher than other banks but so many people actually lost all their money).
Does all this mean I should get out of the markets and sell everything now?
Certainly not – as we have said many times – this too shall pass. It is normal to have volatility in the markets and this is just another example of this. If you have quality assets and you have a long term outlook with your strategy then you should be ok – which has proven true time and time again. However – now is a time to:
- Review your short, medium and long term goals / objectives and needs
- Review your investment approach/philosophy to make sure it is still appropriate
- Review your investments to make sure they still are the quality that you want them to be (it’s a good idea to assess them as if you were going to invest in them – if you wouldn’t invest in them on that assessment – perhaps you shouldn’t be invested in them now)
- Don’t be afraid to make the hard decisions and sell what is no longer quality or what is not likely to be good quality in the future. Sometimes it is better to cut your losses and get into a better quality investment now, that is, one that will either “ride the wave” of volatility better or recover more quickly.
When should I start to invest again?
This is the million dollar question given there is potentially some volatile times ahead – this may mean that the markets could drop. The simple answer is no one knows for sure. Therefore if you are sitting on excess cash, you have done the above reviews and you know what your strategy is for the long term, then there is the potential for some amazing buying opportunities in the coming 6 – 12 months.
The approach we are taking with many of our clients investing for the first time or clients starting with a large cash component, is having a strategy where we “drip in” to the markets over an extended period of time. This reduces the risk of “betting” on one day to invest all your money and hoping that this is the “right time” (similar odds by going to the casino if that is your strategy).
For example, you have $100,000 that you want to invest – you might start with investing $5,000 per month, and then if the market has a large drop you may choose to increase your monthly investment to $10,000 for a 2- 3 months and then go back to the $5,000 per month after that. Therefore, you are not going to overcommit in one month or one day and you will be able to adjust your approach as more information comes. If you get really nervous you may even pause your investing for a few months. Remember Warren Buffett (one of Americas’ great investors) said – “be fearful when others are greedy and be greedy only when others are fearful” – which is a great concept but also takes a great amount of confidence and discipline to act on this. A very clear strategy and philosophy is necessary for you to act on this theory.
So what do you do now?
- Be patient
- Get the best rates you can for your cash but don’t expect miracles
- Set up your strategy now for the next 5-10 years
- Ensure your investments are good quality and don’t have all your eggs in the same basket (diversification is important to spread your risk)
Do you have questions?
If you need some help with your investment strategy or want to learn more about our investment philosophies then take a look at some of our earlier blogs or just pick up the phone and speak to one of our advisors.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686).