What's next for investors?
The economic fallout from the COVID-19 pandemic is far from over, with the impacts expected to last well into 2021 and beyond. Professor Shaun Bond, UQ’s Frank Finn Professor of Finance, considers some specific steps that investors can take to position themselves for life beyond the pandemic.
The past eight months have been a wild ride for investors. At the outbreak of the pandemic, the Australian stock market fell by almost one-third from the record highs of mid-February, with some trading days in March being among the worst on record.
However, signs of a recovering economy and record low interest rates, the market has regained around 80 per cent of those losses. At the time of writing (mid-November), the market was trading at very similar levels to the start of the year.
For many of us, the financial reports from our superannuation funds are less scary to read now than they were earlier in the year. But don’t just tuck them away in a drawer without taking the time to read your latest statement. Now is an ideal time to review how your funds are invested, and to consider how you responded when markets fell sharply. Your response, particularly if you rushed to sell, may be an indication that your investment mix does not match your risk profile.
Taking the time to review your investments now could be an important step to successfully reaching your retirement goals. When you do this, pay attention to the management fees on each of your investments. There is a lot of research to show that actively managed funds don’t outperform passive (index-tracking) funds, and the fee savings from switching can be significant over the life of your investments.
After such a big market upheaval, it’s important to consider if you’re still on track with your retirement savings.
For this step, you might want to make an appointment to see an independent financial adviser if you’re not comfortable with reviewing this yourself. In some instances, representatives from your superannuation fund might be able to assist.
When you consult with the advisor, try to get an estimate on how your current savings rate and asset allocation (mix of investment funds) affect your expected future retirement income. This can be a better measure of your standard of living in retirement than just focusing on how big your superannuation ‘pot’ will be when you retire. This is particularly important in the current low-interest-rate environment, as the expected income generated by your portfolio might be well below what you expected.
For many people, the market falls combined with low rates of return in the future may mean that it is necessary to increase the amount saved towards retirements.
While low interest rates have hurt savers, it works in favour of borrowers. If you have a mortgage, you should check what rate you are currently paying to make sure it’s competitive. It might make sense to refinance given the very attractive rates available now. At the very least, call your bank to see if any better rates are available.
Some people are also using this time to accelerate payments on their mortgage. Whether this is the right strategy for you will depend on your own personal circumstances, as well as what other debts and investments you have.
However, for some people, the comfort gained by paying off their mortgage will more than exceed the potential gain for other uses of those funds.
Image: Jenny Cuerel
For many of us, the financial reports from our superannuation funds are less scary to read now than they were earlier in the year. But don’t just tuck them away in a drawer without taking the time to read your latest statement. Now is an ideal time to review how your funds are invested, and to consider how you responded when markets fell sharply. Your response, particularly if you rushed to sell, may be an indication that your investment mix does not match your risk profile.
Taking the time to review your investments now could be an important step to successfully reaching your retirement goals. When you do this, pay attention to the management fees on each of your investments. There is a lot of research to show that actively managed funds don’t outperform passive (index-tracking) funds, and the fee savings from switching can be significant over the life of your investments.
After such a big market upheaval, it’s important to consider if you’re still on track with your retirement savings.
For this step, you might want to make an appointment to see an independent financial adviser if you’re not comfortable with reviewing this yourself. In some instances, representatives from your superannuation fund might be able to assist.
When you consult with the advisor, try to get an estimate on how your current savings rate and asset allocation (mix of investment funds) affect your expected future retirement income. This can be a better measure of your standard of living in retirement than just focusing on how big your superannuation ‘pot’ will be when you retire. This is particularly important in the current low-interest-rate environment, as the expected income generated by your portfolio might be well below what you expected.
For many people, the market falls combined with low rates of return in the future may mean that it is necessary to increase the amount saved towards retirements.
While low interest rates have hurt savers, it works in favour of borrowers. If you have a mortgage, you should check what rate you are currently paying to make sure it’s competitive. It might make sense to refinance given the very attractive rates available now. At the very least, call your bank to see if any better rates are available.
Some people are also using this time to accelerate payments on their mortgage. Whether this is the right strategy for you will depend on your own personal circumstances, as well as what other debts and investments you have.
However, for some people, the comfort gained by paying off their mortgage will more than exceed the potential gain for other uses of those funds.
Image: Jenny Cuerel
Low interest rates, a shortage of available properties, and incentives for renovation and new home construction have provided support to the housing market. After an initial dip in house prices at the start of the pandemic, many areas are now seeing house prices starting to rise again. This is particularly true in popular suburbs and desirable regional areas, as more flexible working arrangements have opened up a greater range of location possibilities for many people.
Is now a good time to buy a home? In answering this question, I always consider that, for most of us, a home is more than just an investment and your own personal needs and preferences play an important role in your decision. Even though the current situation is improving, a lot of uncertainty remains about the path of the pandemic and the direction of the global economy.
If you are contemplating taking on a large financial commitment now, you need to be comfortable with your own job circumstances and your ability to meet your mortgage payments, even if rates rise in the future. It is also costly to buy and sell real estate, so you need to be comfortable holding your property for a long time as well as being prepared to ignore short-term price volatility.
The information provided in this column is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this column, you should consider the appropriateness of the information for your own objectives, financial situation and needs.
About the author
Professor Shaun Bond is the Frank Finn Professor of Finance in the Department of Finance at UQ and teaches finance as part of the UQ MBA program. He has research interests in the areas of real estate finance and financial economics. Prior to joining UQ's Finance Department, Professor Bond was the West Shell Professor of Real Estate in the Department of Finance at the University of Cincinnati, and the Director of the UC Real Estate Center. Prior to this, he held an appointment in the Department of Land Economy at the University of Cambridge. In addition, Professor Bond has been a visiting professor at the Pennsylvania State University and the George Washington University. Professor Bond holds a PhD and a Master of Philosophy in Economics from the University of Cambridge, and a Bachelor of Economics (First Class Honours) from UQ.
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