Kochie’s Market Update: How to protect your portfolio from a share crash

- February 28, 2020 5 MIN READ
Market update by David Koch

It has been a pretty rugged week on financial markets hasn’t it. It’s a great reminder that financial markets are made of humans and when they panic the herd mentality kicks in.

Investor psychology is a major driver of sharemarket performance… as we’ve seen.

The definition of a “market correction” is a pull back of 10 per cent from market highs.

Well we’ve seen that just this week. There are basically only three decisions for investors to make… buy, sell or sit on the sidelines.

When panic sets in, sitting on the sidelines is often the best decision. Investment history tells us the biggest mistake in times of panic is to sell with the herd. Often buying against the herd is an option if you can afford the heartache if it keeps falling.

But waiting for the markets to settle to develop a trend is also a wise decision.

Remember we are back to sharemarket values of around last October after a booming start to the year… so it’s wise to keep it in perspective.

But what do you do when markets panic?

So how do investors stay solvent when markets slip and slide in times like these?

There are three basic principles that have held investors in good stead in times like these over the past thirty odd years.

1. Take a long term view

Sure, revisit your investment strategy every three to six months, but if it holds tight there’s no reason intermittent ups and downs in the wider market should shake the solid footing of these investments. This means taking a long term view of the market and businesses you invest in and having confidence that over the stretch they will outperform their peers and the wider market.

Sheep are short sighted; don’t sell out with the herd…

2. Don’t invest money you’ll need in the next three years

The old investment saying that time in the market beats timing the market is pretty true in our experience. But timing your exit is nevertheless an important part of investing.

If you’re forced to sell out of an investment because you suddenly need cash then it may mean realising a loss on what was a solid long term investment.

To enjoy the flexibility of a timely exit on your own terms (and we’re not talking about picking the top of the market as that’s a gambler’s game), you shouldn’t invest any money that you’ll need over the next three years.

3. Don’t overextend yourself to invest

So whatever you do, do not overextend yourself to invest. Debt can have a place in a responsible and well planned investment approach, but when you overextend yourself it usually ends badly.

ALSO READ: Top property locations for profit in Australia: Report reveals best performers for capital gain

How to protect your portfolio from a share crash

So here’s how to protect your portfolio against a potential share market downturn.

– Diversify

Diversification is a mantra in financial circles. The logic is simple: if you put all your money in only one investment, it’s clear your fortunes will live and die by its success.

But splitting that money into a range of investments with a low correlation (say businesses in different industries) will protect you if one of them falls over.

It’s important to take a holistic view of your investments when thinking about diversification and not just focus on the share portfolio. Don’t forget about your superannuation, property and any fixed income or business investments too.

– Invest in great businesses

Great businesses don’t fall over in a light breeze. Even with a perfect storm on the horizon, a great business will batten down the hatches and emerge stronger than before.

The market knows this and will often support the share price of a solid company when times get tough and put a rocket up the future recovery.

– Take out insurance

Many brokers will allow you to set a stop loss order on your share positions.

A stop loss will automatically process a sell order if the price of the share falls below the level you set, and therefore limit potential losses.

While they can be a great way to protect your portfolio, be careful with how you use them.

If you set them too high, it’s possible to trigger sell orders during even minor market corrections.

A lot of professional investors also use strategies to “short” the market using things like options and Exchange Traded Funds. Shorting a stock, or market, is where an investor “sells” first hoping to “buy” later to complete the transaction at a lower value and make a profit. It’s complicated, but effective, and you should only do it in conjunction with a good broker or adviser.

– Get good advice

Not sure if you’re sufficiently diversified? Stop loss orders over your head? A financial adviser or broker can help.

An adviser will assess your risk profile and help adjust investments accordingly.

For investors with a low tolerance for risk, an adviser will be able to put a strategy in place to protect you as much as possible in the event of a major downturn, while keeping things on track to achieve your financial goals.

How wealthy are you on a global scale?

At a time when we’re all a little nervous about our wealth as global share markets panic, it’s worth keeping a bit of perspective. To be reminded in the big scheme of things where we stand.

To be among the global top 10 percent wealthiest people, you may not need as much money as you think.

According to the Credit Suisse Global Wealth Index (2018), a net worth of $US93,170 (or just over $140,000 Australian dollars) is enough to make you richer than 90 percent of people around the world. Credit Suisse defines net worth, or “wealth,” as the value of financial assets (including superannuation) plus real assets (principally housing) owned by households, minus their debts.

The average net wealth of Australian households is about $A1million.

You need significantly less to be among the global 50 percent: If you have just $US4,210 ($A6400) to your name, you’re still richer than half of the world’s residents. And it takes a net worth of $US871,320 ($A1.3 million) to be in the global top 1 percent.

Convenience comes at a cost…but it doesn’t have to

 I don’t know about you, but I don’t reckon I’ve used cash for months. Tap and go is just so convenient but the Australian Retailers Association is warning that we are being ripped by the costs imposed.

When we use our cards to ‘tap and go’, the transactions are often automatically routed through expensive international payment networks rather than lower-cost debit scheme networks such as EFTPOS.

Fees for tap-and-go are about four times higher than EFTPOS and add about 40¢ to a $100 transaction for a retailer. The extra costs, estimated at between $350 million and $550 million a year, are passed on to us consumers in surcharges or higher prices or crimp retailers’ profits.

More than 90 per cent of face-to-face transactions are contactless in Australia, which is the highest percentage in the world.

But there is a system called Least Cost Routing, which is a fraction of the cost and the Retailers Association reckons most retailers haven’t been told by their banks that it is available… because the banks keep a slice of the more expensive fee.

Coles, Chemist Warehouse, McDonalds and Hungry Jacks have switched to Low Cost Routing and the Retailers Association wants all companies to be given that opportunity.

Another good way to save money is to not “tap and go” but insert your card, select you account and EFTPOS the transaction… it’s much cheaper.