SMSF Strategies

Don't just do something, stand there

15 Jun 2022 11 day(s) ago

When bear markets hit, unrushed and clear eyed decision making is crucial.

A truism of human psychology is that when markets head into bear territory, irrational feelings rise. The best time to buy of course is when markets have come off, but most people do not do that. If they did, bear markets would quickly stabilise but often they keep going down. There have been seven bear markets in Australia since the early 1980s; the average loss has been 32 % from peak to trough. While markets conditions never stay the same, that does point to the possibility of further weakness on the ASX.

The US market is down over 20%:

It is a test of SMSF investors’ clarity of mind. Worrying about investment performance is not particularly helpful because decisions will have already been made. The important point is to look to plan for the future; try to control what can be controlled.

Many advisers say to older super investors that they should have seven years of cash flow locked in so it is never necessary to sell any growth investments. The advice is that cash or fixed interest investments should be AA or AA minus so they can be liquidated at any time. The reason they point to seven years is that the preponderance of statistical analysis and analytical work has shown that markets eventually revert within 7-9 years.

As one senior financial adviser comments, there are more subtle distractions:

“One of the greatest traps is simply trying to maximise returns. That seems to be perfectly logical. Trouble is, it often leads to bad decisions, because the chase encourages investors to sell after the market has fallen and buy after the market has risen.”

He says this is why having an investment policy is important. “It seems wrong to invest when the market is down, so people tend not to do it. And when the market is rising, investors who are trying to get the best possible return cannot resist jumping in. The same happens to most investors’ tolerance for risk. They are less tolerant of risk when the market has fallen, and more tolerant of risk when the market is rising.

These pressures are hard to resist, no matter how much the rational mind says that it makes sense to buy low and sell high.”

The adviser says it is useful to revisit some basic ideas when looking at portfolios. Here are four:

  1. Shares deliver higher returns than fixed interest securities over time. This is a well known phenomenon that has been widely documented.
  2. The evidence shows that value stocks, over time, have provided higher investment returns than both growth stocks and broad market indexes. This does not necessarily mean that will always be so, but the historical data is clear.
  3. For younger SMSF investors, an enduring truth about the capital markets is that, over time, investors are rewarded in proportion to the amount of risk they take. The higher the risks taken, the better the long term rewards should be.
  4. Companies with high profitability have delivered significantly better returns to investors than the low profitability companies. The trend that can be seen across the majority of time periods. Because the profitability of individual companies remains reasonably consistent through time, there is no need for increased trading, which keeps transaction costs low.

The quip: “don’t just do something, stand there” in bad times may not be exactly the best strategy. But rushing to do something just because things have gone wrong is usually a good way to choose a bad pathway. The key thing to maintain is clarity.


Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.