Investment picks for uncertain times

20 April

One of Australia’s top financial planners says its important to block out the short-term volatility of the sharemarket and the added noise of an election campaign and focus on three- to five-year investment horizons.

Block out the “noise” of a grinding election campaign and look beyond the sharp volatility in financial markets and nervousness about real estate prices, say top financial planners.

Investors need to accept that generating good returns in the short term will be a hard slog, particularly now that extra uncertainty has been injected into the mix with a lengthy election campaign, but there are good returns likely for sharemarket investors with a three- to five-year time frame.

Chris Smith, national winner of the Certified Financial Planner of the Year award in 2015, says it’s crucial that investors remember to make investments with an appropriate time frame, and think about where the sharemarket is likely to be sitting in 2019 and 2020.

He says people who are looking for a good return over the next few months and stability of their capital, need to rethink.

“You can’t have both,” he says. The sharemarket has been spinning its wheels as it fluctuates regularly between 4900 and 5200 points, while bank term deposit rates mainly sit around 3.0 per cent.

“I think people will need to get used to lower returns for now.”

Banks remain strong

But smart investors prepared to look over the horizon on a three- to five-year time frame will do well in the Australian sharemarket, and Smith believes the same goes for property investment in the right areas.

The much-maligned big four banks, ANZ, Commonwealth Bank, NAB and Westpac, which have been heavily sold off in the past few months, are worth a close look.

“If you look at the reasons they are big, they are still relevant,” Smith says. The spotlight is even brighter on the big banks now that Opposition Leader Bill Shorten has promised a Royal Commission into the banks, but Smith says on a five-year time horizon they are likely to deliver solid returns.

This is despite the likelihood of lower dividends in the short term because of increases in bad debts and more capital requirements imposed by banking regulators.

“On a five-year outlook the big banks will remain in strong positions,” says Smith, a partner with VISIS Private Wealth. The banks go through cycles but are still very strong businesses, he says.

Still wealth in property

Smith says property will still be an important wealth-creation tool for investors, even though care is needed in the short term to avoid the “red-flags” in apartments and other hot-spots.

The strong price rises, mainly centred on Sydney and Melbourne, of the past few years have come to an end for now, but Smith says both residential and commercial property are still good investments in the right locations over a long-term horizon as part of a broad portfolio with allocation to a spread of different asset classes.

“There’s still wealth to be created if you’re investing over the medium to long term,” he says.

Joe Stephan, owner of independent Melbourne firm Stephan Strategic, who also lectures at RMIT University in financial planning, says portfolios should be set up with a specific time frame in mind, and investors need to ensure they have the right mix of growth and defensive assets.

“If people are concerned about volatility in the market, then they need to ask themselves are they invested in the right spots,” Stephan says.

He says it depends on investment goals and how close to retirement they are, but many of his client’s portfolios mirror the broader Australian sharemarket, with a skew toward more defensive stocks.

The firm had increased its use of index funds and exchange-traded funds. “That way we get a bit of everything,” he says.

Stephan says the broad investment principles of buying good-quality assets should deliver solid returns over an extended period, even with the uncertainty that may come with potential changes to superannuation rules, which have been the subject of speculation in the run-up to the election.

But his clients understand that overall returns are likely to be more subdued in the short term compared with the high-growth periods of the past.

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