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Missing the post-COVID share market bounce-back

16 September 2020 | Julie Berry, Technical Specialist, GAICD, CFP®
Doctors Wealth Management, an Avant company

The COVID-19 pandemic has had a major impact on the global economy and will certainly shape doctors’ financial decisions in the future.

Looking back to February this year, our share market reached a peak of almost 7,200*. This meant those who had their superannuation or investments in Australian or Global shares were generally posting great returns and retirement balances were looking healthy.

When the pandemic hit, our market reacted to the fear and uncertainty by initially falling to around 4,550 in March, a fall of 37% from the highs. Global equity markets also saw significant declines during this time.

The fear created by this slide caused some Australians who may not be receiving financial advice, to react and move their superannuation funds from shares to cash. This meant they missed out on the returns once the share market bounced back post the March lows and finished the financial year at around 6000 points, an uptick of 32% from the low.

Is moving to cash risky?

The following scenario^ looks at the impact of moving from shares to cash in times of market volatility. During the global financial crisis (GFC) Dr Sanford held a balanced portfolio worth $50,000 in her superannuation which was first invested in January 2000. The portfolio was made up of 60% shares and 40% Australian fixed interest, and was rebalanced to this monthly. The table below looks at three scenarios.

The first scenario is where the doctor remains disciplined to long-term objectives and didn’t react to market noise around the GFC.

The second scenario is where the doctor was nervous about shares being expensive in 2008 just before the GFC market falls and moved the portfolio to cash. While a good short-term decision, unfortunately the portfolio has remained in cash since then.

The third scenario is where the doctor got spooked given the market falls and moved to cash during the GFC and near the market lows at the time.

Over the twenty-year period to July 2020, had Dr Sanford held onto the balanced fund through the GFC and stayed the course, she would have received an average annual return of 7.3%.

Portfolio  1. Balanced (60% shares, 40% fixed interest)2. Balanced then moved to cash in 20083. Balanced then moved to cash in 2009

Return pa

7.3%

6.2%

4.2%


Considering Dr Sanford started the period with $50,000, had she stayed disciplined and invested the entire time (even accounting for COVID-19) she would have been better off. This is demonstrated in the charts below.

Growth of AUD$50,000

 DWM graph 1

Avant Investment Team

What should you consider before you switch?

Importantly, while you may have seen a fall in your superannuation or investment portfolio balance right now, until you sell the investment you are in, you have not yet realised a loss. However, as soon as you move to cash you crystallise that loss and timing the market to buy back into shares is difficult, even for professional investors. It becomes even more noticeable when you consider the low returns on cash you are currently receiving.

Interestingly, cash is generally thought to be a low risk investment. However, one of the risks of holding cash is that you may not make sufficient returns to fund your retirement income as there is no growth potential and you are relying only on interest rates. You may even have to draw down capital to create enough income to meet your needs.

Had you been given the opportunity to talk through your situation, this may have helped you to understand what the markets are doing and how to manage your superannuation or investments to maximise your circumstances.

Considering the answers to questions such as: ‘what are your cashflow requirements and timeframes?’ and ‘what are your return requirements or expectations?’ can make all the difference in knowing when to change your investment strategy to make it work best for you.

Share market falls are normal and should be expected

 DWM graph 2

Avant Investment Team

Get expert help to plan for your future

Holding your nerve when everything looks grim can be a challenge, but we can help you to understand the impact on your personal portfolio and make smart decisions about your superannuation and investment portfolio. To discuss your situation and investing goals, contact the expert team at Doctors Wealth Management, an Avant company. Book an appointment today or call 1800 128 268.

*Australian Securities Exchange (ASX) All Ordinaries index is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the ASX.

^ This scenario is for illustrative purposes only and is not based on any particular individual's experience. Any relation to actual people is purely coincidental.

Important: The material contained in this publication is of general nature only. It is not, nor is intended to be legal, accounting, tax or financial advice. Doctors Financial Services Pty Ltd (DFS) and its related entities have not considered your individual objectives, financial situation and needs in providing this information. If you wish to take any action based on the content of this publication we recommend that you seek appropriate professional advice. While we endeavour to ensure that this information is as current as possible at the time of publication, we take no responsibility for matters arising from changed circumstances, information or material. DFS and its related entities will not be liable for any loss or damage, however caused (including through negligence), that may be directly or indirectly suffered by you or anyone else in connection with the use of information provided. Doctors Wealth Management is a registered business name of Doctors Financial Services Pty Ltd ABN 56 610 510 328, AFSL 487758. Doctors Wealth Management Financial Advisers are Authorised Representatives of DFS.

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