Sharemarket SMSF Bear Trap

Sharemarket Bear Trap or Bargain for SMSF Investors?

This correction could turn out to be the opportunity of a lifetime or a nasty sharemarket bear trap, and the difference can boil down to knowing what you don’t know.

This article was original published in the Australian Financial Review 21/04/2020 under the title “What to consider before snapping up bargain stocks”.  The original article can be found here.

When a sharemarket plunges 37 per cent in a few weeks, it’s hardly surprising that many investors smell a bargain and look to take advantage of the big drop in prices by snapping up some heavily sold shares.

Given the market’s bounced 18 per cent from its recent lows, so far it’s worked out well for many. But before you’re tempted to try your hand at doing the same thing, there are some important questions you should ask yourself.

Short-term punt or long-term investment?

You might fancy your chances of making a quick trading profit, with the intention of being in and out within days or weeks, or even telling yourself you’ll hang on for a year or two.

Anything that’s less than three to five years is a punt, not an investment – especially when there’s not a person on the planet who can tell you when the full effects of the most comprehensive economic shutdown we’ve ever experienced will have washed through. Like any punt, you’ll need to be prepared to lose money.

On the other hand, if you see this as an opportunity to start, or add to, a long-term portfolio, there are still some questions to ask.

Personal or SMSF?

First, do you think you’ll need to use the money for anything before you retire? If so, it makes sense to invest in your own name.

 

But if you’re sure you won’t need to access the money once it’s invested, you really should be looking at investing in your super fund if you can because it provides potentially enormous tax advantages. If your marginal tax rate is, say, 30 per cent, compared with the 15 per cent rate in super, that difference can really add up over several years.

That means you need to be on top of your super contributions. Have you, or are you likely to have, maxed out your concessional contributions (for example, the ones you get through work) before the end of the financial year? If not, topping up your concessional contributions to the $25,000 limit (including compulsory super contributions) could bring you the added bonus of a tax deduction. If you have, or will, hit that limit, explore whether you’re able to make a non-concessional contribution of up to $100,000. You’re able to bring forward three years of non-concessional contributions in one hit if you haven’t already triggered the three-year bring-forward rule.

You need to be careful of the details, so speak to a financial adviser or your super fund if you’re unsure.

DIY or outsource?

When share prices have fallen a lot, it’s easy to think you can’t lose no matter what stocks you pick. That is not true. No one knows how long or deep this downturn will be. While the government is stepping in to plug some of the gaps, that money should be seen for what it is: a rescue package, not a stimulus. There’s a very real risk businesses could fail. In just the past few weeks, dozens of Australian companies have had to raise money through share placements to prop up their balance sheet.

If you don’t feel confident you have the skills or knowledge to work out whether a company has what it takes to survive, you’re taking on a lot of extra risk by making your own investment choices. Another choice is to outsource the decisions to a fund manager, whose analysts are trained to pick apart a company’s financial accounts and who are often able to pick up the phone to a CEO or CFO at short notice.

Specific stocks or index?

Once you choose to invest through a fund manager, the challenge is working out which ones are any good or which style best suits you: value or growth, big companies or small, fundamental or quant?

If choosing a fund manager or selecting which stocks are going to survive and prosper is too daunting, you can opt to buy an index fund. These simply replicate either an entire country’s sharemarket, or a part of a sharemarket, or even a region’s sharemarkets like Europe or Asia. You can buy an exchange traded fund (ETF), which will replicate an index, as easily as you can buy individual shares on the stock exchange. Popular ETF issuers in Australia include Vanguard, iShares, BetaShares or SPDR.

The advantage of buying an index fund is you get instant diversification and it takes the decision-making out of your hands, which is why it’s also called “passive” investing, as opposed to trying to pick stocks, which is called “active” investing. Importantly, you can reduce your risk even further by buying index funds for a variety of different markets, a process called asset allocation.

This correction could turn out to be the opportunity of a lifetime or a nasty sharemarket bear trap, and the difference can boil down to knowing what you don’t know.

James Weir is a director of Steward Wealth.
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We needed a better way to look after our SMSF clients. So we created one. We experienced first hand the frustration of the ‘old way’ of looking after SMSFs: Financial statements that were out of date by at least 6 months and of no use to anyone other than the ATO, high fees and poor value due to highly skilled and knowledgeable staff spending unnecessary time on laborious data entry and worst of all SMSF trustees not getting the right advice at the right time!