Five tips for tough times

By Christine St Anne *


The last couple of months have seen some spectacular dips in the Australian sharemarket. While not as extreme as the global financial crisis three years ago, the relentless market volatility has tested the mettle of many investors.

In times like these, it is crucial investors maintain their focus on long-term investing. Below, Westpac Financial Planning executive financial planner David Simon and HLB Mann Judd partner in wealth management Jonathan Philpot have outlined some lessons investors can take from these volatile times.


1. Block out the noise

There is no doubt that bad news sells. Sovereign debt problems following a possible default in Greece continue to feed the frenzy of media reports.

These reports have added to investor unease. Philpot suggests the best strategy for investors is to "block it all out".

"From an adviser perspective, we are paying too much attention to market events. We try to work out what is going on with economic events. If the experts don't know what is going on, what hope has an investor got?"

Often, in extreme market events, investors get spooked, including retirees who are known for selling down in favour of cash.

"Retirees are taking a huge risk trying to make these calls. It is best not to base investment decisions on what is going on, but rather invest according to your goals," Philpot says.


2. Make tweaks - not wholesale changes

Market dips can provide investors with an opportunity to review their asset allocation. A typical balanced portfolio includes investments across a range of asset classes including equities, fixed income, property and cash.

"During times like this, equities tend to fall at a disproportionate level to other asset classes like cash and fixed income. Investors can rebalance their portfolio to their original risk profile by taking some of their investments in cash and fixed income and replenishing their equity portfolio," Simon says.

"This approach allows investors to sell some assets at higher prices and buy other assets at lower prices."

Philpot says investors need to be cautious with this approach, given that markets can be hit by extreme movements during volatility.

An investment rollover or fund redemption can sometimes take weeks to finalise and by then the market could have moved four or five points.

"In making portfolio changes, investors should avoid making wholesale changes that involve moving large investments around, but a bit of tinkering is fine," Philpot says.


3. Keep an eye on your income

For retirees, income in their portfolio plays a critical role in retirement. To boost their income, some retirees have been forced to sell their shares in falling markets.

Simon says retirees need to ensure they have enough liquidity in their portfolio, which prevents them from having to resort to an asset "fire sale".

"Retirees should have three years of the income portion of their portfolio in defensive assets, including an adequate level of cash. This will help them avoid selling assets prematurely," he says.

Term deposits have proven to be very attractive to income-seeking investors given their interest rates. Philpot says investors should continue to compare the returns of these term deposits to sharemarket returns.

Despite the fall in the Australian equity markets, companies have continued to pay out dividends, with many even increasing their dividends.

At the same time, the big four banks have moved to cut their term deposit rates from 6 per cent to around 5 per cent.

"Although the sharemarket has been going backwards, dividends have been increasing. For retirees wanting income to fund their pension, this is a good sign," Philpot says.

"Term deposits no longer have the same headline returns. These investments have fallen by 10 per cent, yet the sharemarket has only fallen by 3 per cent. It's interesting that this has somehow slipped under the media's radar."


4. Look at dollar-cost averaging

Making regular investments over a period of time can help investors avoid extreme portfolio movements that come from market dips.

"Often investors feel they need to invest all their income in one single point in time. Dollar-cost averaging allows investors to make regular investments over a period of time rather than all at once," Simon says.

"This prevents investors from buying at the peak of the market."


5. Old rules still apply - diversify

One of the most fundament rules to investing is diversification.

Investors should avoid having a concentration in one asset or to one asset class, Simon says.

* Christine St Anne is Morningstar's online funds and ETFs editor.

Source: Morningstar