Now that the long-running Federal election is finally over, can SMSF trustees find some clear air to consider their 2016-17 investment strategies? Hopefully, yes. Realistically, no.
The kerfuffle that was Brexit was a reminder that political worries can create unhelpful investment markets – and might persist for some time. As soon as one problem seems to pass, another one appears. In a world of very low interest rates and investment returns probably over the medium term, markets don’t need any more doubts.
But, of course, there will always be more scares from local politics and from world politics and economics. Braving these fears is part of the price of investing in shares. Most SMSF investors should know (or should realise) that abstaining from the markets is a recipe for low returns – and a good way of missing any rallies. For example, those quitting markets after the two negative GFC years of 2007-8 and 2008-9 could have missed participating in seven consecutive, quite positive years.
Source: SuperRatings
So, as is always the case, while there are risks in investing in the long term, there is no alternative. In the short term, investors need to adjust their portfolios (and their thinking) to the realities of low returns and to the chances of volatile results. That means concentrating on dividend-paying shares and maintaining a buffer of cash.
Realistically, SMSFs in pension mode need to be aware of the trend of more frequent negative years over the past decade and a half. A good rule is to have at least two years of pensions payments in cash. And, with many stocks far from cheap, investors need to wait for really good – or even exceptional – buying opportunities.
But, given the closeness of the election result, in the short term, investors might also need to pause and consider if the proposed rules for superannuation might be fine-tuned after the backlash among Coalition voters. SMSFs might usefully wait to see if there is any change to the proposals to limit the amount that can be put into pension funds or, indeed, to see if some rules even make it into legislation.
The proposed combination of a limit on capital invested plus even lower interest rates will inevitably focus attention on how little retirement income can be safely generated from $1 million-plus amounts. And the lack of grandfathering of contributions and the inevitable “hard cases” that emerge are likely to lead to amendments.
In the meantime, the start of a new financial year is a logical time to review investments. My portfolio now has almost 20% in bank shares and hybrids (for income) and 20% in infrastructure stocks (for stability). Despite the attractions of bank share yields, the likely squeeze on bank margins (and a possible threat to dividend pay outs) makes me cautious about chasing bank shares further.
The portfolio also relies on dividends from Telstra, Woolworths and Wesfarmers (comprising a total of about 18% of the portfolio). There’s another 9% in health stocks and only 6% in resources. (It would be nearer 10% if BHP and Woodside get back to my entry prices!)
Brexit has had a minimal impact on individual stocks; small holdings in BT Investment and Clydesdale Bank may be vulnerable, while there is now a small question mark over Wesfarmers with its UK hardware chain purchase.
But a more significant adjustment is likely as a result of the threat to markets from any currency turmoil. My portfolio has ignored gold as an investment but now it might be worth holding some gold as a hedge against disruptions. That might mean perhaps some direct holding of the metal (via an ETF), plus shares in one or two of the bigger gold producers.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.