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Investors urged to keep calm in face of corrections

Nicki Bourlioufas  |  29 Jan 2019Text size  Decrease  Increase  |  
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The wealth of Australian households could fall this year as property prices drop and as share prices possibly correct further.

Some Australians might be thinking about implementing wealth preservation strategies, but financial planners warn against knee-jerk reactions.

According to the most recent household wealth data from the Australian Bureau of Statistics, net household wealth fell marginally to $415,024 in the September quarter of 2018 from $415,616 in the June quarter, down from a record high of $416,258 in December 2017.

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Financial planners warn investors not to react to any short-term market movements

However, net household worth is still up $7,627 or 1.9 per cent over the year to 30 September. Over the past five years per capita wealth has risen by almost $106,000 or 34 per cent, according to analysis by CommSec.

Looking ahead, per capita wealth may consolidate closer to $400,000 after significant gains over the past five years, according to Ryan Felsman, senior economist with CommSec.

"Home prices are likely to fall further – especially in Sydney and Melbourne. And global share markets have become increasingly volatile on investor concerns about slowing global growth, rising US interest rates, technology valuation concerns, trade uncertainty and mounting geo-political risks," says Felsman.

Long-term goals remain key

Financial planners warn investors not to react to any short-term market movements or volatility ahead, but stick to their long-term investment strategies.

Scott Keely, a financial planner with Wakefield Partners, says it is crucial for investors to ensure their asset allocations adhere to their risk tolerance and objectives.

"Every year there is 'noise' about an asset class. This year it is property, it's often shares, and in recent times cash and fixed interest have been avoided due to low interest rates.

"Our advice to our clients when they ask about the 'crisis of the day' is to revisit their original strategy for investing and to make sure that their asset allocations are still in line with their risk tolerance and still linked to achieving their objectives," says Keeley.

"Keeping cash available is also a sensible strategy. One, it prevents the need to sell down assets at the worst possible time (during a correction) to fund your lifestyle goals, and secondly, for the more astute investor, it allows the potential to snap up distressed quality assets at low prices," says Keeley.

Rob Holder, an asset allocation specialist with Crestone Wealth Management, says that investors should maintain diversified portfolios with long-term allocations that are appropriate for their risk and return objectives, but advocates tactical shifts in response to market movements.

"Rather than making wholesale changes, using modest tactical tilts to subtly shift portfolios is a good way to mitigate short-term risks and to take advantage of short-term opportunities.

"One of the key benefits of strategic asset allocation is that the disciplined approach helps avoid the pitfalls of emotional decision-making and the potential negative impacts of behavioural biases, which can be heightened at times of market volatility.

"Our current tactical preferences show a tilt toward alternative assets, which are expected to provide superior risk adjusted returns in the current lower return and higher volatility environment – a tilt that proved profitable in late 2018.

"Being moderately overweight to cash also provides the opportunity to deploy capital at more attractive prices in the event of a sharp correction," says Holder.

According to Jan Adamson, financial adviser with countplus one, investors should regularly review and rebalance their portfolios in line with their long-term investment objectives.

"Where a client’s situation has changed, we would review their asset allocation to determine if it is still appropriate to their circumstances," she says.

"The preference is for a quarterly rebalance, however, this is not always practical. We rebalance clients at least annually. If a mechanism exists for an auto rebalance, we would do that quarterly," says Adamson.

Cash, share holdings at record levels

According to the ABS wealth data, Australians still have their assets allocated to a record level of cash. Households held a record $1.13 trillion in cash and deposits at the end of September.

Cash and deposit holdings represented 21.4 per cent of financial assets, up from 21.2 per cent in the June quarter, but still below the 21.9 per cent average since the global financial crisis and long-run average of 21.6 per cent.

Households held a record $989.9 billion in shares or 18.7 per cent of all financial assets in the September quarter, up from 18.6 per cent in the June quarter. Superannuation assets rose by $40 billion to a record-high $2.29 trillion in the September quarter.

Of these, cash and deposits stood at 10.7 per cent of financial assets, below the 13.1 per cent average since the global financial crisis, but above the long-term average of 9.4 per cent.

is a Morningstar contributor.

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