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13 Aug 2020

3-strategies to pandemic-proof your investments

By Jonathen Chan Build performance into your portfolio in any market

The impact of COVID has undeniably demanded attention, as it has kick-started a new economic cycle and heralded in a bear market and global recession.

With uncertainty being a known certainty for the foreseeable future, it has made the caution “don’t try to time the market’ more relevant than ever.

To help you navigate uncertain markets, we look at three key strategies long-term investors use to look through the noise.

1. Understand your goals and timeframe

Data from Bloomberg shows during the first phase of COVID-19 stock markets declined 30-35 per cent in March this year, but rallied 25-30 per cent in April-May as expectations COVID restrictions would end sooner than expected. Second wave fears and a realisation that recovery would take time saw markets pummeled again in June, ending the month 3 per cent lower.

The roller coaster ride has left the S&P 500 down 3.24 per cent since the start of the year, while the ASX200 is down 9.74 per cent, as of July 1. The Dow declined 36.65 per cent in February to March, and rallied 31.65 per cent in April to May. Year to date, it is still down 7.8 per cent as we entered August.

For investors that try and time the market, COVID-19 has been and continues to be a wild and sometimes scary ride. However, for long term investors with an asset mix that allows for absorption of volatility, there has been greater scope to watch events from a more detached view.

Wealthier investors tend to take a more cautious approach, as a key part of their portfolio planning is to protect their wealth. Instead of chasing high returns but high risk opportunities, investing is about steadily growing their portfolio and limiting the downside.

2. Diversification is the only free lunch

In the wealth management industry we have a saying, ‘diversification is the only free lunch’. This saying has certainly proved true while navigating the impacts of the pandemic.

Australians traditionally have concentrated their investments in property, shares and cash. The first two suffer in downturns, and the latter is certainly not king in the current low interest environment.

This means more asset classes need to be considered, particularly in times of volatility. It's a message we have pushed consistently in recent years, and it appears investors are listening. 

For example, Citi’s bonds transaction volume in January-February this year increased by 165 per cent compared to the same period in the previous year. Clients wanted to take a defensive stance, opting not to chase returns that put their money at risk.

There were also increased volumes into term deposits, which were up 16 per cent quarter on quarter. For those still wanting limited exposure to equities, structured investments also gained greater interest, with volumes at the start of the year up more than 240 per cent compared to January-February 2019. Through structured investments, clients can invest in equities with a hedge to partially offset risk.

The outcome is these clients managed solid portfolio performance at a time when risk in equities was escalating, and income falling as dividends were slashed. Its proved to be a better strategy to the one we see all to often, where investors seek more gains as equities rally, and get caught in the panic selling when markets suddenly fall.

3. Learn about and use different asset classes

We have established that Australians are overweight to shares. However, as the year has unfolded, it has become clear the benefits of holding shares is diminishing. Apart from the difficultly of forecasting market direction, dividends have been slashed and profit outlooks are on a downward trajectory, indicating dividend payouts may deteriorate further.

Bank dividend cuts have particularly hurt, as traditionally many investors used reliable bank dividends as the income side of their portfolio. A significant portion of superannuation is also heavily invested in the Big Four banks.

This is another reason to consider asset classes outside of shares, property and cash that are readily available, like term deposits, corporate bonds, and managed funds – to name just a few. Investors should remember to not just dismiss an investment type because the return seems lower than other asset classes – it’s about balance and risk.

One trend for wealthier clients during this crisis has been to diversify through holding investments in multiple currencies. We have seen volumes double since the start of the year.

This is to take advantage of the benefits of safe haven currencies like the US dollar and Japanese Yen in times of high risk, and the strengthening of the Australian dollar as risk lowers For these transactions, make sure you use an account that can hold multiple currencies, and allows you to switch back and forth between currencies without all the transaction costs that used to be associated with such activities.

Despite the gyrations occurring in the share market, Australian’s will continue to be heavy investors in shares – it seems to be part of our DNA. That’s ok, but it remains important to learn how to balance a portfolio with other elements, so that when trouble hits the downside loss is manageable.

Jonathen is an Investment Specialist at Citi Australia

Wealth Solutions