Geoff was recently asked to comment on Macquarie Bank’s robo advice that is advising members to exit the market and stay in cash while this volatility purists.
Here is what Geoff had to say on the matter;
Yes, the markets are volatile and that volatility is going to continue – but if you can handle the volatility because of your risk tolerance, need for income or your investment time-horizon, I believe you should stay in the market.
Why? A well-diversified portfolio of shares may provide you with a better income flow than cash whether in a savings account or term deposit. Also, if you pull-out now, when are you going to buy back in? It is very hard to time the markets with any degree of accuracy and mis-timing can be an expensive mistake.
An argument for pulling out is that a number of investments have recently paid their dividends or distributions (e.g. ANN, PIC, ALI). Some more have gone ex-dividend (the dividends belong to the seller not the buyer e.g. TLS, CBA, BAF) so, if you sell now, you have still got those payments locked in but what about the future?
Cash rates for on-line saver accounts are in the region of 1.40-1.65%1 p.a. Term deposit rates currently range from 2.10-2.35%2 for 90 days to 2.40-3.05%2 for 1 year. With these, you have capital safety but a further rate cut is forecast for Melbourne Cup day that may reduce these returns further. However, if you are likely to need access to your capital in the short-term, then now may be a good time to sell.
If you can handle the volatility I mentioned, have the time to leave your capital in the market and you are focused on income more that growth, you may get a better income return from shares in the shorter-term. For example, analysts forecast CBA and TLS dividend yields3 for the next 2 years will be over 6% fully franked*. If you prefer broader diversification than holding a few of your own shares, an actively managed Australian share fund may be the answer. Depending on the focus of the fund, after fees income returns of 4.98% p.a. since inception in 1998 (3.58% over the last year)4 or 5.64% p.a. since inception in 2006 (6.48% over the last year)5 argue for staying in the market*.
This commentary is for general information only and should not be taken as personal advice. Do not act on anything you have read in this article without seeking professional advice.
1 Macquarie & CBA Accelerator Cash Account
2 ING, Macquarie & CBA
3 Morningstar Investment Detail for CBA and TLS – mention of these companies should not be taken as a recommendation, they are just used as examples for this article
4 IML.com.au Performance figures for Australian Share Fund as at 31 August 2016
5 SGH ICE Fact Sheet 31 July 2016
*Analysts have been known to be wrong and past returns are no guarantee of future returns.