What if there is another GFC?
Written by Glen James
Host of the Retire Right & money money money (formerly my millennial money) podcasts & author of The Quick-Start Guide to Investing.
Community member asks: In early 2008 the ASX was roaring around 6800, it never really recovered till 2013. A lot of retirees had to keep working, how do we know, that history will not repeat itself?
Glen: I love this question. I was working in financial advice as a paraplanner when the GFC (Global Financial Crisis) took place. I saw first-hand how the market crash impacted share prices and subsequent portfolio values. The thing was the advisers I was working for at the time were literally coaching clients daily and reiterating the important to keep invested, sticking to the plan and focusing on their overarching strategy.
Fast forward to 2015 when I was self-employed as a financial adviser, I started taking clients on from an accounting office that had all of their superannuation in cash. Many had actually set up a self-managed superannuation fund (SMSF) once the GFC hit, as they had lost some face value of their portfolio (up to 35-40%), got scared and wanted to move to cash that was safe. They did this with a SMSF. Now, it’s very questionable that an SMSF was even needed, as they could have moved their super to a cash option within the fund (that’s a story for another day!).
When the GFC hit it did take about 12 years for the ASX to get to the pre-GFC level and approximately 5.5 years for the S&P500 (US share market).
Most people would have had superannuation in pre-mixed investment options that consisted of Australian shares, International Shares, Infrastructure, Australian Property, Fixed Interest (cash, bonds, etc) and maybe some gold.
Now, the thing that our behaviour reacts to is what we see. We see values falling and we freak out and want to sell out to stop the pain of loss. The biggest thing here is that those who moved out of their investment options to cash once the market dropped had the following experience:
They sold their investments at the worst time (bottom),
They missed any recovery and their superannuation contributions that were being invested were being invested in cash, not buying shares while the prices were very low; and the biggest issue was…
They did not remember that while the share price may have reduced, the portfolios were still paying dividends throughout the year. The dividend income from their portfolios would have been more than the rock bottom interest rates they were receiving with money in cash (remember how interested rates dropped suddenly and stayed low for years!).
They say (whoever “they” are), ‘history doesn’t repeat, it rhymes’. But either way I want you to learn about your superannuation & investments and how they operate. We are not taught about managing money or superannuation and often we are left to our own devices. I truly believe (& know as I had done the numbers in the past) that the clients who were scared and moved their portfolios to cash after the crash of the GFC probably missed out on thousands and thousands of investment returns. Simply put, they reacted without a strategy or understanding what they were invested in.
We saw a similar crash with the pandemic, it was a very sharp ‘V’ shape recovery and people who sold out of fear lost thousands as they didn’t buy back into the market until the recovery was almost over.
You might be thinking, ‘all of this is cute, but what do I do?’:
Learn more about your investment options! What is the asset allocation? Is it all shares and property? Is there some that are diversified into defensive assets such as bonds?
Understand that even though you are wanting to stop work at age 60, or 67, most of your money would still need to be invested to keep producing an income for your lifestyle and retirement years.
Consider working out how much you need to live off per year and allow some cash buffers. If you needed $52,000 per year – can you have around $100,000 of your super or pension account in cash? This is so if there is another little hiccup – you can keep the lion’s share of your money invested and know you have two years of buffer so you do not need to sell down out of fear.
Get financial advice and consider an ongoing relationship with a financial adviser. If they stop you doing things out of fear – that advice and support could be worth hundreds of thousands of dollars.
Have a strategy, however small.
Good diversified investments work if they are left to do their thing, people don’t!
So, to answer this community question… we know that markets are volatile and react to real life events. We can, however, get educated and continue to learn how markets work and have plans in place to adapt to such events without needing to panic and sell down our portfolio out of fear. This is why I created the Retire Right podcast to help education Australians on all things investing, superannuation and retirement.
Glen James is one of the hosts of the Retire Right podcast and his latest book the quick-start guide to investing is out now!
