Tag Archives: Investments

How investors can respond to stock market shocks

By Robert Wright /April 14,2020/

If the threat of a large-scale outbreak of an infectious disease isn’t enough to worry about, the financial implications of coronavirus is also making investors nervous.

You may have read about how the shutdown of industry across China, effectively the world’s manufacturing hub, risks hurting the global economy. You may also have heard about large falls in global stock markets, in addition to the price of commodities such as oil. It feels like there’s been no shortage of alarming twists.

Despite this, a market correction can even be a good thing in the long run. In this article, we share how coronavirus may impact investments and how investors can respond to market shocks.

Why does coronavirus affect stock markets?
There are a few reasons. The first is because it is impacting the ability of companies to produce goods. For example, Apple has already said that factory shutdowns in China will prevent it from getting hold of some of the parts it needs to make iPhones.

The second is in how it affects demand. For example, consumers and companies are cutting back on unnecessary travel, hurting the travel and tourism sectors. Many other sectors are also experiencing a fall in demand, such as the hospitality industry, as more organisations are encouraging staff to work from home.

The third is the impact on investors’ willingness to take risk. Before the coronavirus crisis, the stock market had been performing very well and many investors were sitting on considerable profits. This was despite economic growth having been relatively weak for years.

Many investors had been uncomfortable with how far stocks had risen against this backdrop. Coronavirus has given them the reason they were looking for to bank some of those profits and reduce their exposure to the stock market.

What is the silver lining for investors?
Those with a longer investment horizon can worry less as investing is a long-term game. That is not to say someone with investments should just ignore current volatility though. There are some sensible steps to take, and there might even be opportunities for the brave.
While negative headlines about the stock market can be off-putting, investors should be grateful for them. Every dollar invested today could buy considerably more shares than it would have done at the start of the year.

Five sensible steps to protect your investments

1. Don’t panic – think long-term
It’s important to make considered decisions when adjusting your investment portfolio. An emotional response will very rarely benefit your savings. By staying invested now you could benefit when the market picks up again.

2. Reassess your attitude to risk
What these episodes can usefully do is prompt a re-evaluation of how much risk we are willing to take. It’s all very well charging into the stock market when it’s been going up for years: these corrections remind us there can suddenly be a downside. Many of us will take some risk in the hunt for higher returns, and there are ways to moderate that risk.

3. Reassess your portfolio
Are you happy with the mix of risk? Check you are happy with the proportion of your savings that are in the stock market as opposed to cash or government bonds, and diversify if you are concerned. Some funds offer ready-made diversification by spreading across asset classes. Do your research. You could de-risk yourself by simply holding more cash in savings accounts but be aware of the effect of inflation versus interest rates.

4. Diversify your exposure to the stock market
Even within the portion of your portfolio that is invested in the stock market, be sure that it is diversified in itself. Some people have pet regions or sectors and over-reliance on them can be a set-up for big losses if things go wrong. Either diversify yourself or choose managed funds that are themselves diversified.

5. Drip-feed
By investing a regular amount each month you take away a lot of risk – it is the opposite of trying to time the market. In times of stock market falls the amount you invest will be picking up more units. This means you will ride out much of any market volatility.

Source: Schroders, March 2020

How much do I need to start investing?

By Robert Wright /September 02,2019/

While investing might seem daunting, you don’t need a huge amount of money to start.

While investing into traditional property might require a significant deposit, and a commitment to a long investment horizon, investing in shares, ETF’s, managed accounts or managed funds can be accessed with a much smaller outlay along with the benefit of shorter term access to the value of your investment should the need arise.

It’s all about knowing where to start, which is quite often the hardest step. But we all have the potential to be successful investors – all it takes to get started is being armed with the right knowledge.

Taking the first steps

While some prefer to take the first few steps alone, others seek professional advice before investing. Either way, it’s important to select an investment type after you have done your research, determined your personal goals, and weighed up how you feel about risk.

Considerations such as your investment timeframe, current market conditions, expectations of future market conditions, and your tolerance to capital loss, and volatility (both positive and negative movement in returns) all need to be taken into account when choosing the right type of investment. This step alone is critical in assessing your propensity to take certain levels of risk to achieve an expected return over a given timeframe. 

As mentioned above, it doesn’t take a lot to get started. You can begin investing directly in shares, or a managed investment (offering a diversified range of investment assets including shares), with a lump sum of as little as $1000, or less when setting up a regular investment plan. You can also contribute regularly to steadily grow your investments and build a diversified portfolio – while taking advantage of the benefits of compounding returns.

Paying yourself first

If your budget isn’t quite working and you’re struggling to set aside funds to grow initial capital, there is an alternate strategy.

Called ‘pay yourself first’, instead of aiming to save whatever is left over after regular bills and expenses, consider setting aside a fixed percentage of your regular wage or salary as soon as you get paid. Better still, set up an online funds transfer with your bank timed with each pay day, so that this amount goes directly into your savings account – you may be surprised how quickly you can accumulate funds to start investing.

Doing the groundwork

Be sure to do plenty of research so you understand the market and assets in which you’ll be investing. You should also research the products you’ll use to invest in that market, such as a managed fund (you should always read the Product Disclosure Statement for the fund itself). For shares in a listed company, it might mean looking at companies’ annual reports, analyst research reports or on a stock exchange’s website.

The key point is, there’s a wealth of information you can, and should use, to help decide which investments to consider. This information should also provide insights into the risks and to some extent the tax implications of the investment you are considering.

Another critical piece of research and decision making driver when choosing the types of investments to use is looking at the costs of investing. Things such as brokerage when purchasing shares, management fees and buy/sell costs when purchasing managed funds are key when investing as when investing small amounts, fees can play a major part in impacting your initial outlay. 

Source: BT, 2019

Six cognitive biases that influence how we save, spend and invest money

By Robert Wright /September 02,2019/

We like to think we’re rational beings. But the reality is that a lot of our daily behaviour is influenced by our subconscious.

Behavioural scientists have looked at the way human beings are wired and discovered some ‘cognitive biases’ that influence our everyday behaviour. So if you find yourself clicking on that Amazon special or buying lunch at the same expensive cafe near work every day, they could explain why it’s so difficult to stick to your spending limits or saving plan.

Here are a few of their insights into how our minds work.

We tend to discount the future

We value immediate rewards over rewards in the distant future. This tendency to want instant gratification is hard wired from birth. Studies have shown that children find it hard to stop themselves eating a treat even when a bigger and better treat is offered for those who wait for a few minutes. And ‘discounting the future’ doesn’t stop when you reach adulthood. It could explain why it’s hard to get too excited about saving for your retirement in your 20s. But the earlier you start planning, the more you’ll be able to put away.

We tend to feel the pain of a loss more than the pleasure of a gain

You can see an extreme example of this sort of behaviour at the casino when gamblers chase their losses. This ‘loss aversion’ can also manifest itself in continuing to commit to a poor investment because you’ve already put a lot of money into it. It can help to think long term and avoid focusing on short-term fluctuations in the value of your investments.

We tend to follow the herd

Much as we like to think of ourselves as independent human beings, we tend to look to others for affirmation. Think about the rush to secure seats for the concert when you know that everyone else is using the online booking system. It’s all about FOMO. This sort of ‘herd mentality’ can work in a positive way. Just a generation or two ago it was socially acceptable to smoke in restaurants or to drive without a seatbelt. Now it’s unthinkable.

When it comes to money, this ‘herd mentality’ can manifest itself after stock market downturns, when investors start panicking and selling up, even though rationally this will crystallise their losses. It can help to shut out daily market noise and focus on long-term goals.

We tend to think things are more likely to happen than they are

You can see this in the popularity of lotteries around the world. While the chances of winning are infinitesimal, the winners get a lot of publicity, which makes us think it’s more likely to happen. But at least the lottery is relatively harmless. Thanks to the global mass media, this ‘availability bias’ often focuses on bad events like kidnapping, plane crashes or stock market downturns.

Investors who experience a market crash like the GFC over-estimate the chances of the same thing happening again, even though statistically it’s unlikely. It can lead to people saving for retirement changing their investment preferences to lower risk investments, even though this may not be in their best interests as their long-term returns struggle to keep pace with inflation.

We tend to favour recent reference points when making decisions

This ‘anchoring bias’ can make it easy to overspend in shopping malls. When you first see a pair of shoes for $200 and then a similar pair for $150 it’s easy to anchor on the first amount and perceive $150 as a great bargain. And these days it doesn’t stop when you leave the mall—online shopping means plenty more opportunities for that anchor to embed itself and end up in an unwanted purchase.

To counter this, try setting your own ‘base price’ before you set out shopping and stick to it. You can also see anchoring in practice when investors rush in to buy stocks that have just plunged in value without looking at the underlying performance of the company. They have made the mistake of anchoring the recent high point in their mind.

We tend to be a bit lazy

We tend to stick with current plans rather than change if it’s too much hassle. This is probably why so many of us stay with our utility providers rather than shopping around for a better deal. If you find yourself suffering from ‘status quo bias’, try making a start with one area of the household finances—say, your electricity bill—to make it more manageable, rather than trying to tackle everything at once. Source: AMP

Five global themes that may impact your investment portfolio

By Robert Wright /September 02,2019/

When running a self-managed superannuation fund (SMSF), it’s important for investors to be aware of some of the key global and economic environmental factors that may impact their investment portfolio.  Here we look at five global themes that are currently playing out in world markets, and how they may potentially impact their investment portfolios.

1. Trade Wars

Trade tensions between the United States and China have shown their ability several times to cause turmoil in the investment markets.

The showdown kicked off in July 2018, when the US implemented its first China-specific tariffs. In turn, China has retaliated with its own tariffs, and threatened a range of other measures that may affect US businesses operating in China.

Things escalated in May 2019, as the US extended tariffs on a range of imported goods from China, drawing further tit-for-tat measures from Beijing.

With the solution of the trade tensions having a long way to go; nobody wants to see a full-blown trade war. The prospect makes markets nervous, and that may mean volatility for portfolios.

2. Slowing global economic growth

Global economic growth is an important driver of investment performance, but to a certain extent is hostage at present to the trade war concerns.

In March 2019, the Organisation of Economic Co-operation and Development (OECD), Australia’s peer group of developed countries, said in its Interim Economic Outlook that global trade growth had slowed from 5.25 per cent in 2017 to about 4 per cent in 2018.

In April 2019, the International Monetary Fund (IMF) cut its global economic growth forecasts for 2019 and said growth could slow further due to trade tensions. The IMF lowered its growth forecast for the global economy in 2019 from 3.5 per cent, which it expected back in January, to 3.3 per cent with the ongoing trade tensions remaining a risk for the global economy.

Any further deterioration in the outlook for world economic growth could mean volatility for equities.

3. Growth in China and how it affects Australian Resources

As China’s economy has grown, the world has become used to spectacular numbers: its gross domestic product (GDP, the amount of goods and services produced in the economy) grew at an average annual rate of 9.5 per cent between 1989 and 2019, with a peak of 15.4 per cent in the first quarter of 1993.

Falling Chinese economic growth rates is not good for investors, as it raises concern for global economic growth. Investors are now conditioned to expect Beijing will stimulate the economy when growth rates slip, but there are also concerns about its ability to sustain this given China’s huge levels of debt.

One of the closest exposures to China that many Australian SMSFs have is through holding shares in the big miners that supply the country’s voracious heavy industries including: BHP (iron ore and steelmaking coal), Rio Tinto (iron ore) and Fortescue Metals Group (iron ore). While China is a concern at the portfolio level, in terms of the sensitivity of the broader share market to perceptions of Chinese economic health, at the company level, these stocks continue to benefit from selling to China.

The big miners are also benefiting from the fact that iron ore supply from Brazil has suffered in the wake of January’s tailing dam disaster. Brazilian miner Vale has stated that it could be up to three years before it resumes exporting at full capacity, and the supply disruption means that iron ore prices are likely to stay stronger than had been expected over that time.

4. The low-interest rate environment

The low-interest-rate environment that has been the investment setting for several years appears unlikely to change anytime soon. This is mainly due to central banks being reluctant to lift interest rates from long-term lows and bond yields pushed lower as investors become pessimistic about economies.

The dilemma for yield-oriented investors is that income is difficult to find in the traditional areas, meaning that higher risk has to be borne to generate higher levels of income. In Australia, listed shares have been popular for this purpose, using Australia’s dividend imputation system: infrastructure investments, real-estate investment trusts (REITs) and corporate bonds have been other alternatives used.

The challenge of a global low-interest-rate environment for investors looks like it will remain for some time.

5. New and disruptive technologies

An area that has opened up for investors recently is new and disruptive technologies. These include advances in areas such as cloud computing, artificial intelligence, virtual reality as well as social and new media.

Companies that have “disrupted” established industries by doing business differently such as the likes of Amazon, Uber, Netflix and Airbnb, have created new levels of value in very short periods of time, but now find themselves vulnerable to disruption.

The digital and IT-powered revolution will continue to pose both risks and opportunities for investors: the only certainty for an investor is that technological advances cannot be ignored.

Source: BT