Time to trim the sails
Do you have enough to Retire?Free Retirement Plan Health Check
Local and international share markets have performed surprisingly well over the last couple of months. In fact, since its low on 23 March, the ASX 200 benchmark has recovered more than 30%, and at the time of writing it’s just 16% down on its all-time high set on 20 February.
Markets in the US have been even more spectacular. The S&P 500 index has recovered to be within just 6% of its record high and the technology-based NASDAQ benchmark has recovered all of its lost ground.
Things are looking positive. It appears we may have controlled the COVID-19 virus outbreak. In Australia we’ve flattened the curve and in NSW we’ve experienced several days now with no new infections.
The lockdown is being eased earlier than many expected and we’re doing business again in the streets of the North West and New England.
The winds have changed
But we think it’s time for a reality check.
In Australia we’ve just experienced our first quarter of economic contraction: the March quarter. Our economy shrank on the back of the devastating bushfires and the initial COVID-19 lockdown.
Just wait. There’s no doubt the June quarter will be much worse.
According to the Reserve Bank the economic contraction has been faster than any time since the Great Depression. That’s around a dozen economic cycles and this is the worst.
We estimate a contraction in the order of 8-10% in the June quarter alone.
Even in a best-case scenario it could take several years for the Australian economy to recover.
A time for caution
Before the COVID-19 market correction, Australian share markets were already at all-time highs. We believe they were overvalued because they weren’t backed by any sustainable fundamentals. And they’re still not. It’s sentiment and naïve optimism at play.
The strong returns we experienced in April and May were welcome but they’re not sustainable. A rational investor shouldn’t expect continued strong returns over the short and medium-terms.
The outlook is still highly uncertain. There’s a real possibility of a second wave of COVID-19 infection. The health and economic crises are fast turning into a social crisis. We’re seeing global social unrest in the form of the Black Lives Matter movement, and a trade war with China is looking increasingly likely as race tensions rise.
Batten down the hatches
If you’re a retiree or approaching retirement, it’s time to review your portfolio. Investment losses hurt most when you are five years either side of your retirement date.
There is significant risk of short-term investment losses at the moment and you should be looking to protect yourself.
A good place to start is by setting aside the money you intend to spend over the next two or three years. Park that money in cash or a fixed-term deposit.
You won’t receive much yield on that money, but it will help you weather the storm and give you peace of mind that there is money there when you need it.
Even better, it will release you to take a longer-term view of the rest of your money and invest it in a more diversified way safe in the knowledge you won’t need access to it any time soon.
For retirees, it’s time to get active, take control and engage with your money. If you’d like to know more, give us a call. Because when you engage with When Financial Solutions, it’s not a matter of ‘if’ your retirement will be shipshape, but ‘when’.
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances. If you would like advice specific to you please give us a call.