Recent months have brought business disruption, rollercoaster equity markets and the completely unforeseen financial pressures to the doors of many Australians. This elevates the risks of irrational or impulsive decisions and can make it as important for prudent financial advisers to manage client emotions as manage their money.
CommSec Senior Economist Ryan Felsman says the first step is for financial advisers to remind anxious clients that their investment plan has been drawn up to counter unforeseen economic events and changes in personal circumstances.
“Advisers need to remind their clients that they are investing for the long-term,” he says.
“While the immediate focus of clients during the virus crisis is on their health, the impact on their families, concerns about their businesses, income and job security, most clients have already lived through periods of market volatility in their lifetimes and will come out the other side.”
Secondly, advisers should reassure their clients that they are well equipped to deal with the challenges of a new operating model – like running their businesses from home – and that they are appropriately tech-enabled, staffed and contactable to meet their client’s financial needs. This may mean rebalancing the client’s portfolio if their goals or financial circumstances have changed due to the pandemic.
“A review of client portfolios is critical during heightened market volatility so that both client and adviser ‘stay the course’ – identifying sectoral and cash target allocations – and timing the market particularly if there has been a significant drawdown,” Felsman says.
“Having sufficient liquidity, allocating strategically, being adequately diversified across asset classes and considering tax loss re-harvesting are all critical ingredients for a client’s long-term financial plan in this environment.
“Ultimately an investment strategy and portfolio should reflect their combined financial goals, investment timeframe and individual risk appetite.”
Volatility unearthing value
While it is incredibly difficult for advisers to completely ignore the macroeconomic backdrop with large parts of the economy shutdown and jobless numbers rising, Felsman argues there is still the possibility of decent returns from shares over a 12-month horizon.
“Depending on your risk appetite and where you are in the income accumulation phase, I would recommend a large allocation to domestic and international shares counterbalanced by fixed income, commodities, infrastructure and property exposures in order to generate decent risk-adjusted returns for your portfolio,” he says.
Despite global uncertainty and a vaccine that may be many months away, portfolio managers, traders and investment strategists know that market dislocations and corrections present opportunities for stock pickers and sector allocators.
Felsman sees volatility unearthing some value for investors and their clients, especially from individual companies with quality assets and management teams, growth and earnings potential, product offering and channels, balance sheet strength and ability to deliver dividend income to shareholders.
“It is important that advisers – where possible – get a good handle on some of the key metrics around company earnings and valuations – such as Price/Earnings (P/E) ratios and Earnings Per Share (EPS),” he says.
“Earnings and cash flows will undoubtedly fall in the months ahead due to the economic downturn with balance sheets increasingly stressed due to the virus shutdown."
“There is still plenty of income as well as value to be found in sharemarkets with the ‘search for yield’ ever present – especially when comparing the value of shares with other investments. Overall, industry, sector and individual company research remains critical in determining the quality of a client’s portfolio.”