15 strategies to beat the market turmoil

Astute investors who move cautiously and remain optimistic about the long-term future of the sharemarket can cash in on the investment opportunities of a lifetime. By MICHAEL LAURENCE

By Michael Laurence

Astute investors who move cautiously and remain optimistic about the long-term future of the sharemarket can cash in on the investment opportunities of a lifetime.

There are three key things that investors must do if they want to survive the current market turmoil.

First, refuse to let yourself be caught up in the panic selling that is engulfing much of the market. Next, concentrate on cleaning-up your finances by paying off as much debt as possible and minimising taxes on your portfolio. And all the time, consider buying shares in quality companies that panicking investors have dumped at bargain-basement prices.

Significantly, this is an extremely smart time to gain financial planning advice from a professional who you can really trust. Check whether your investment portfolio’s long-term asset allocation – its diversification between the main asset classes – is still appropriate for your personal circumstances, including your financial needs and tolerance to risk.

Often the most-valuable task that an adviser can perform is to provide you with reassurance – as long as the advice is accurate, of course – that your long-term investment strategies are still on track and that you are approaching the prevailing turmoil in share and credit markets in the right way.

The 15 strategies below have been prepared by speaking to advisers and investment managers over the past two decades.

1. Eliminate emotion from your investment decisions

The emotions of fear and greed should have no place in your investment decisions. Investors who panic when markets are sharply falling, and become overly exuberant when markets are sharply rising, are following an almost sure formula for losing money.

For instance, why sell a top quality stock that has already fallen say 30% or more in line with the rest of the market? Surely such a decision to sell is emotionally driven in most cases. given the stock’s value should eventually recover – but it is likely to take time.

2. Stick to the long-term asset allocation of your portfolio

In most instances, if the long-term asset allocation of your portfolio was appropriate before the market began to fall, it is likely to be still appropriate today. This is provided that your personal circumstances – including your tolerance to risk and financial needs – have not changed.

Therefore, your portfolio is most unlikely to require a drastic makeover in light of the current market havoc.

3. Focus on things that you have control over

Rather than becoming overly concerned with what is happening day-to-day in the markets, concentrate more on what you can have control over. For instance, reduce your debt (particularly your non-deductible debt), minimise capital gains tax on your investment portfolio by keeping the turnover of your shares to a minimum, and check whether you are paying excessive funds management fees. Further, re-examine your personal budget, looking for ways to save money.

By the time you have finished these practical chores, share prices may well have begun to turn upwards again and any temptation to flee the troubled market may have passed.

4. Don’t overlook the true costs of selling

The selling of quality stocks at depressed prices is a wasteful exercise. It will crystallise the fall in stock prices, trigger capital gains tax on any past capital gains, and prevent you from fully benefiting from the inevitable market turnaround.

Many smart investors wisely focus more on their franked dividend yields when markets are particularly volatile, and don’t become overly concerned that the paper value of their portfolio has fallen. The importance of the income side of investing should never be overlooked.

5. Use the market downturn as a selective buying opportunity

Concentrate on quality stocks that have been hit hard. This means investing in companies that are market leaders, well-capitalised and that have excellent management teams. But buy in the knowledge that the market could continue to fall for some time before its eventual turnaround. Take a really long-term perspective and don’t count on any quick profits.

6. But don’t buy rubbish because its price has fallen

A dog of a share doesn’t suddenly become worth buying because its price is a fraction of what it was a few months ago. Rubbish remains rubbish, no matter the cost.

7. Drip-feed your money into the market

This means rather than investing all of your capital into the market at one time, invest it regularly in equal proportions over the next six or 12 months.

You are less likely to lose capital if the market continues to fall over the next few months, yet you should be well-positioned to enjoy the benefits of the market rebound.

And you will average-out your buying costs over your buying period, and reduce the possibilities of being hit by a sudden fall or rise in share prices over a short period.

8. Consider making future super contributions into cash

If you are understandably reluctant to keep buying shares in this market, one strategy is to make your future super contributions into your fund’s cash investment option until the market settles. And the diversification of your existing investment portfolio could remain intact if still appropriate for your circumstances, including your personal tolerance to risk (see strategy two).

9. Build-up a cash reserve if nearing retirement

Some financial planners suggest that their clients, depending upon their circumstances, enter retirement with enough cash to carry them through two or three years of future downturns in the sharemarket. This will reduce the possibility of being forced to sell quality assets to pay for your living expenses during bear markets.

The prevailing market turmoil could be viewed as a good time to build-up this cash reserve (see strategy eight).

10. Keep contributing to super

Think carefully before reducing your salary-sacrificed super contributions because of the market turmoil. By keeping up your voluntary contributions, you should partly offset the fall in the value of your portfolio and put yourself in a stronger position for the eventual market rebound.

Your contributions into, say, a balanced or growth super portfolio will buy many more units at this time than when markets are riding high.

11. Simultaneously take a workplace pension and make higher salary-sacrificed super contributions

This strategy is potentially a big winner for those over 55 who are eligible for a transition-to-retirement pension – also known as a workplace pension – and who have the ability to salary-sacrifice more into super.

The string of benefits from this highly popular strategy are; salary-sacrificed contributions are taxed only at the standard 15% contributions tax, the taxable proportion of the pension is taxed at your marginal rates (with a tax rebate of up to 15% until you reach 60 when the pension becomes tax-free), and assets within your super fund that are supporting the payment of the pension are not taxed.

Significantly, the combining of a transition-to-retirement pension with increased salary-sacrificed contributions can provide an opportunity to maximise your retirement savings.

12. Consider remaining longer in the workforce

Face reality. Your retirement savings, on a short-term perspective at least, are likely to have been hard-hit by the current downturn. If you are within a few years of retirement, consider whether you should remain longer in the workforce than initially planned, perhaps working part-time, rather than drawing down on your retirement savings when markets are way down.

A transition-to-retirement pension may help you stay in the workforce longer (see strategy eleven).

13. Check eligibility for a part-pension

The fall in the value of investment portfolios is likely to make many more retirees eligible for a government part-pension.

A home-owning couple can own other assets valued at up to $873,500 and be eligible for a part-pension. Pensioners can ask Centrelink to reassess the value of their shares every two weeks to determine their eligibility for a part-pension.

14. Look to your five-year-plus returns

Your investment returns are likely to be shocking for the past 12 months or so, but look to your five, seven and 10-year returns.

For example, the five-year annualised returns of super funds with balanced or growth portfolios are still satisfactory, respectively returning an average of 9.3% and 9.64% to 31 August (the latest figures available), according to fund researcher SuperRatings.

Taking a longer-term perspective will help you put the prevailing market downturn into perspective and reduce any temptation to over-react.

15. Look to the past for a possible guide to the future

World sharemarkets in the past have, of course, rebounded strongly from some events and downturns that seemed horrific, particularly at the time.

Since 1974 alone, for instance, the markets have staged impressive comebacks from the OPEC oil crisis, the 1987 sharemarket crash, the Asian financial crisis, the bursting of the IT bubble, the 11 September terrorist attacks, and the invasion of Iraq.

Although financial planners emphasise that the ability of the market to strongly recover in the past is no guarantee of the future, it is a valuable guide and helps put the current market turmoil in a long-term context.

Australia has had nine bear markets since 1960, while the United States has had eight not counting the current bear market, says Shane Oliver, head of investment strategy and chief economist of AMP Capital Investors.

“Since 1960, bear markets in US and Australian shares lasted an average of 15 months,” says Oliver, “with an average top-to-bottom fall of 32% in the case of US shares and 34% in the case of Australian shares.

“In the current bear market, shares have had top-to-bottom falls of 29% in the US and 33% in Australia, which is similar to bear market declines. There is a good reason to believe that the bulk of the damage has been done.

“With shares now cheap, policy action to rectify the problems intensifying worldwide and investors now in panic mode – which is positive for shares from a contrarian perspective – there is a good reason to believe shares will be up on a 12-month perspective.”

Oliver concludes with a few reassuring words: “The world is not about to end. While this has been predicted on numerous occasions in the past, such predictions have been premature, and the same will apply this time around.”