SMSFs are not paid to panic

The message on asset class diversification has never been clearer.

Summary: Look at the pricing on offer in the share market now, particularly for higher-yielding stocks. Consider diversifying your portfolio, noting that bond markets have not collapsed during this share market rout. And remember to make calculated decisions, without panicking.

Key take-out: I’ve brought forward cash contributions to my SMSF to have cash ready to pounce on Australian shares.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

It’s hard not to panic in an event like this. But if Monday’s slump scared you witless, then give yourself a shake. You’re not a fund manager who is paid to panic. You’re an SMSF trustee – you have time, you must take time, to consider options clearly.

Australian SMSF investors tend to be invested like barbells. Not all, but a serious majority. Literally, for many, what they don’t have in Australian equities is usually invested in cash, via high-interest online savings accounts and term deposits. We know what they’re currently yielding – lower than 3 per cent.

If you have been holding on to too much cash for too long, is this the event that you’ve been waiting for? The ability to go in and pick up assets for around a 13 per cent discount to the price being happily paid by investors only a few months ago? 

If you were ploughing in on Monday and first thing Tuesday morning, then you might have done well out of this. If the market bounces too much more from here, then you might have missed this boat.

SMSF trustees do not, unlike fund managers and stockbrokers acting for clients, have to make panic decisions. You don’t have to answer to short-term performance criteria. You only have to answer to yourself.

And if you’re not worried about how you end a given month, or year, then rationally look at your current investments, versus the pricing on offer now.

Have you looked at the traditional SMSF favourites of bank stocks? The Big Four are averaging fully-franked yields of around 6.5 per cent. Grossed up, that’s more than 8.5 per cent! For long-term thinkers, who don’t believe Australia is about on the precipice of the mother of all property crashes – APRA is clearly concerned – then those bank dividend yields have got to look attractive. As do some of the capital raisings (CBA’s doesn’t close for another week or so) and any future potential capital raisings. When bank capital raisings go into round two, they usually have a round three also.

Bank stocks have been murdered. They are off far more than the broader market. But unless you think that their overall dividends are in for the sort of 20-30 per cent falls that occurred during the GFC, then consider if they should have a stronger place in your portfolio.

And that goes for all of the higher-yielding stocks that hold a special place in SMSF portfolios.

Remembering to diversify

Another lesson to learn from the fall is that horrible old chestnut of diversification.

Bond markets have, simply, not collapsed during this recent rout. Since early August, bond prices have rallied marginally, up about 1 per cent.

See my most recent annual asset class evaluation (Were your returns super or normal?, July 15), which, sadly to some, again showed that avoiding bonds, listed property and international shares hurt returns in any portfolios not carrying them. (That doesn’t mean the same will apply this year, but they have certainly helped in recent weeks, as Australia’s market has fallen further than international shares in general and bonds continue to outperform cash.)

Having a diversified strategy that took in the asset classes often ignored by SMSF trustees would have continued to help in recent times.

What? You don’t know anything about bonds and don’t want to try to pick a basket of international shares from your computer screen in Australia?

I hear you. And you don’t have to. To get this sort of asset class diversification – that pays off not only in circumstances such as this – consider outsourcing the job. Most simply and most easily, to the likes of an index fund manager.

Don’t panic

Most importantly, your job as a SMSF trustee is to make calculated decisions, without panicking. You have the luxury of time.

For anyone holding more cash than they believe they should be now, the main message is to carefully consider unwinding an overweight cash position. Potentially to take advantage of bargain basement stock prices.

Do you buy back in above 5200 points? Do you wait for what is likely to be continued volatility to take the market back below 5000 points to pick up some real bargains?

My opinion, and my advice to clients, is to have cash ready to pounce on Australian shares. Or to consider taking advantage now, if you were thinking about doing so in recent months, at higher average levels.

One way to help this might be to bring forward cash contributions to your SMSF that you are likely to make later in the financial year to now, so that the cash is ready to invest. That’s exactly what I did first thing Tuesday morning, literally as I was nursing a sick child. Click, click, click and the money was on its way, ready to invest as of this morning.

I usually make the bulk of my contributions in May and June and I know that I’m going to make the contributions anyway, so I’ve bought forward a chunk to potentially be ready to pounce.

Cash isn’t normally king. But it could be right now… if we don’t get an immediate bounce back above 5500 points.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E: Bruce’s new book, Mortgages Made Easy, is available now.

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