Welcome to our April newsletter which we bring to you at a time of enormous economic uncertainty. At times like these it’s important to have someone to talk to, so we urge you to contact us if you have concerns about your finances.
The health and economic impacts of the coronavirus increased exponentially in March, as did the response of national governments and central banks. As part of a suite of emergency measures, the Reserve Bank of Australia (RBA) cut the official cash rate twice – first to 0.5 per cent and then to 0.25 per cent – as official rates in the US and Europe were cut to near zero. The RBA also began buying government bonds to bring yields down in line with the cash rate, as well as offering a term facility to banks so they can supply credit to small and medium businesses.
It’s too soon to know if these emergency measures will stave off recession (technically two consecutive quarters of negative growth), but Australia was better placed than many countries heading into the crisis. The Australian economy grew 0.5 per cent in the December quarter, up 2.2 per cent over the year, while company profits rose 8.1 per cent in calendar 2019 to record highs.
Global markets remain extremely volatile. Australian shares fell around 17 per cent in March while US shares fell around 15 per cent. Crude oil prices fell more than 56 per cent as a production agreement between OPEC and other oil-producing nations broke down. Australian wholesale petrol prices fell to a 16-year low, while the national average price of unleaded petrol fell to a 13-month low of 127.6c a litre. The Aussie dollar fell about 5 per cent over the month to just below US62c, after briefly dipping below US56c.
Making peace with the unknown
Life constantly challenges us with unknowns, yet some of these hit closer to home and harder than others in their impact.
The coronavirus is unprecedented in our lifetimes, so we are charting new territory in the world’s response to this crisis. The uncertainty around its far-reaching impact is creating fear for many around the globe, as governments act to minimise the spread of the virus.
Due to the fast changing nature of the government response to this momentous challenge, there are significant unknowns. There are short term unknowns around the government’s evolving response to the crisis and you could be concerned about the stability of your work situation. And longer term about how will this impact you into the future? Perhaps you’re wondering when you will be able to retire as your super balance takes a dive? Will the economy and businesses survive the disruption? How will you be supported through this period?
You are not alone in experiencing these fears. As humans we like to deal with ‘knowns’ and plan accordingly, rather than be at the mercy of uncertainty and instability. Whether it’s something as big as the coronavirus or a smaller unknown, there are however ways we can become more comfortable with uncertainty.
Planning for the unknowns
Planning for the unknowns sounds like a contradiction. After all, if we don’t know how, when and if we will be impacted, how can we plan for it? Yet planning for potential outcomes can help us feel more in control and be one less worry to deal with.
You don’t need to think of every possible eventuality, but given the challenges society is facing, consider what the implications mean for you and your family. What can you do to minimise the impact?
Then the next, possibly more challenging thing to do, is to accept that you can’t plan for all eventualities and acknowledge that there may be some things out of your control. Focus your attention on what you are able to have some control over and then look at narrowing the list down to what really matters most to you, letting the rest of the ‘noise’ dissipate.
Stay positive and engender connection
The situation is changing rapidly and it’s tempting to constantly monitor news feeds, as it can feel more empowering to feel like you know what is going on. Just be mindful of taking breaks from the updates if they are fuelling feelings of uncertainty. Step outside and enjoy a little fresh air, call a friend or just do something small that gives you a bit of a breather and a little perspective.
The societal impact of the coronavirus is huge and is having a significant impact effect on many of our lives. It’s important to remember that these changes aren’t necessarily permanent and that we are all in this together.
Connection is important in helping us feel grounded and supported during a period of uncertainty. This crisis is first and foremost a health and human crisis, so we need to be respectful of not only our own health, but those of others. We can help those who are more vulnerable. There are many good news stories arising of people assisting and connecting with their neighbours and those in need.
Understanding the impact on the markets
Markets have experienced a significant downward trend as the impact of the coronavirus continues to develop across the globe. This has had a significant impact on investments and more broadly on superannuation account balances.
While it is understandable to feel unsettled, consider your long term financial goals. Avoid making rash decisions based on fear, as this can crystallise your losses and put you on the sidelines for when the market recovers and as history shows, it always does.
Especially during this period of uncertainty, I hope you are keeping well and looking after yourself. We are here for you every step of the way. Don’t hesitate to get in touch if you need assistance.
Are your insurance needs covered?
The start of a new year is always a good time to check whether your insurance policies are still serving your needs. But this year there is even more reason to review your cover.
If your super balance is less than $6000 or you are under 25 and are a new fund member, life insurance in your superannuation will no longer be automatic come April.i
Letters have already been sent out to those affected by the change which is part of the Putting Members First/Protect Your Super Package legislation.
If you don’t respond to the letter by advising your super fund that you want to maintain your cover, it will be cancelled.ii
Since last year, super accounts inactive for more than 16 months have been in a similar situation with automatic cancellation of life insurance if the member doesn’t opt in to continue their cover. There are a few exceptions, such as defined benefit funds, so contact your super fund if you’re unsure.
Of course, most Australians with super won’t be affected as their balances exceed $6,000 and they are aged over 25. Indeed, due to the existence of default life insurance offered through super, many more Australians have cover than in previous times.
Sometimes, however, this cover may be insufficient to cover your actual costs, should you need to make a claim.
Underinsurance still common
A 2017 survey by Rice Warner found the median death cover was only twice the median household income. Yet it’s estimated that people in their 30s with children would need replacement income equivalent to eight times their family income to continue their current lifestyle if one parent were to die.
Similarly, total and permanent disability (TPD) cover is generally only three times the median household income when four times is ideal. TPD pays you a benefit if you become seriously disabled and are unlikely to ever work again.
While life and TPD cover have grown thanks to super, only about 30 per cent of the working population has income protection insurance. Income protection pays you regular income for a specified period when you are unable to work due to temporary disability or illness.iii
Given the size of mortgages these days and the cost of raising a family, this low level of income protection cover is concerning.
You probably don’t think twice about insuring your car or your home, so why think twice about insuring your ability to earn an income should something unexpected happen?
Do regular check-ups
Insurance needs vary depending on your income, your age, your family situation and your working status.
Clearly if you have a young family and a mortgage, your financial commitments will be greater than if you have paid off your mortgage and your children have flown the nest.
That’s why it’s important to check your insurance when it comes up for renewal and/or when your personal circumstances change. For instance, if you have recently married, had a child or retired you may need to alter your level of protection.
Inside super or out?
For some, life insurance outside super may provide more tailored cover than insurance offered inside super, or you might decide to have a combination of the two.
Life insurance in super is often cheaper because super funds can negotiate group rates and your premiums are paid with pre-tax dollars. Generally, you will be covered without having to undergo a medical, but there are drawbacks.
Unlike insurance inside super, cover outside continues when you change jobs. And claims are likely to be faster as benefits are paid directly to the policy owner and not to the fund.
Also, outside super, you can insure “own” occupation rather than “any” occupation with a TPD policy. This means you will get a payout if you can’t continue working in a similar occupation to your current one. “Any” occupation is a much broader definition and can lead to a lower chance of making a successful claim.
Life insurance is a must for most people, but it will be of limited use if you don’t have adequate cover should you make a claim.
If you need help determining your current insurance needs, give us a call.
Hold on… volatility ahead
After period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19). We are seeing significant falls as well as rallies as the markets react to what measures policy makers are taking to provide economic support and soften the impact of the coronavirus.
Markets move in cycles, at times like this it’s good to get some perspective.
Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years.i After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely.
The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.
Avoid knee-jerk reactions
At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a ‘safer’, more conservative option in your superannuation fund.
While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.
It’s near impossible to time the market, particularly at the present moment with a volatile market that is responding to a situation that is changing on a daily basis. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines as the market recovers. As history tells us it always does.
In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to resist making fear-based decisions and focus on your investment horizon.
Have a plan
Investing is a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to knee-jerk into decisions that may not be the best in the longer term.
Your plan needs to take into consideration your unique situation, financial goals and your comfort with risk.
Low risk comes with lower returns
Many people are wary of investing in shares because of the risks of the kind of market event we are currently experiencing. Growth assets such as shares and property do entail higher risk but they also deliver higher returns in the long run than cash in the bank.
While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.
Spread your risk
Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.
A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t sink your ship.
The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance.
A disciplined approach
Rather than sell shares in quality companies in a panic, continue to collect your share dividends which may be more attractive at present than the returns available from cash and some fixed interest investments. It may even be worth considering reinvesting dividends in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.
When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss or review your overall investment strategy, don’t hesitate to get in touch.
Falconer Advisers Pty Ltd ABN 48 068 857 741, trading as Falconer Advisers, is a Corporate Authorised Representative of Hillross Financial Services Limited ABN 77 003 323 055, AFSL No. 232705. General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.