How to take advantage of market volatility in your SMSF
With volatility becoming an ongoing feature of markets, its important not to be fearful of it and instead embrace volatility by conditioning yourself to it from the outset.
It’s said the only constant is death and taxes, but perhaps share market volatility should be added to that list.
The Australian market has experienced a period of heightened volatility since the start of 2016, trading in a range between 4765 and 5263 points between January and the end of June, a difference of 498 points. While volatility can be disconcerting for some investors, there are opportunities to increase the value of a SMSF when market values are moving around.
Damian Liddell, a financial adviser with Browell’s Financial Solutions, says it’s important for investors to accept that volatility is an ongoing feature of markets. “lt’s always going to be there and so it’s important to embrace it,” he says.
This can be easier said than done, as it’s always disconcerting watching the value of assets rise and fall. So when it comes to embracing volatility Liddell says it’s important not to be fearful of it and instead to condition yourself to it from the outset. His advice to SMSF investors is not to change their strategy even when markets are volatile.
“Our advice is to remain focused on long-term investment goals. Heightened volatility is today’s normal environment. We've probably been spoiled in the last couple of years when volatility was lower. SMSF investors may make some tactical tilts or slight changes as a result of volatility to try and take some advantage of market movements. But for the large part, you don't need to change your strategy too much.”
However, when volatility is heightened it can be an opportunity to look for stocks that have been overly discounted by the market. “That's often when you can buy good shares at under-priced values and it can be a good time to take advantage of those opportunities,” says Liddell.
For some investors, there will be opportunities to buy specific stocks. For others it will be a chance to identify an active fund manager to which SMSF investors can outsource the responsibility for identifying well-priced shares.
Liddell says despite the market volatility, his clients are maintaining their focus on their long-term strategy. “For the most part they have been sitting tight, which comes down to education about not changing tack when markets go up and down.”
However, when markets are volatile investors naturally turn to the role of defensive assets in their portfolio. These include cash and fixed interest investments, whose returns are generally uncorrelated to growth assets like shares. While it can be tempting to sell down assets that have made a loss and shift money into cash, it’s important to be aware of the impact this will have on future returns, should markets rise again. When that happens, if the growth assets have been sold down, the portfolio won’t benefit when their asset values rise again.
“For most people, it's about having an asset allocation that works for you and sitting tight,” Liddell says.
As for how volatile markets will be for the remainder of the year, he says expect conditions to remain bumpy.
With the Australian federal election and the UK’s decision to leave the European Union behind us, Liddell says the most likely driver of upcoming volatility will be the anticipation of another lift to US interest rates. While the rhetoric from the US Federal Reserve has indicated it won’t lift rates soon. In her June statement to the market, chair of the US Federal Reserve Janet Yellen, indicated the US was still on a path to increase its currently very accommodative monetary policy stance.
In the statement she said, “I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation.” Adding that, “the economic outlook, including the pace at which the neutral rate may shift over time, is uncertain, so monetary policy cannot proceed on any preset path.” Therefore, it is not known when any future rate rise will be.
When this happens, markets could go either way. They may trade upwards if investors believe the rate hike is a sign of economic improvement, or they could trade downward, as cash as an investment becomes more attractive as rates rise.
It’s not possible to predict the direction of markets with any certainty, which is why most advisers suggest maintaining a consistent approach to investing, even when markets are volatile.