Daniel Rose

Listening to the news and reading the papers can scare investors into making rash decisions. So how can you navigate falling markets and market volatility?

The financial press worked itself into a frenzy last week as the benchmark S&P 500 in the US briefly reached a 20% fall from its recent high in January. The Australian market has been a little better, falling 8.3% from its more recent high. The difference is mostly due to the relative lack of tech companies here in Australia.

When investors see red across their portfolios, the emotions this can trigger often lead to poor decisions. So, here’s a short guide to navigating market volatility.

Part 1: Before the downturn

My clients all have a Statement of Advice which was completed during times when markets were more calm, and for investors that usually means ‘going up’. It is this document which details your long-term plans.

For accumulators these plans may be different from my retiree clients, but the sentiment is the same – we have invested funds for the long-term and there will inevitably be periods of negative performance. I say again, there will be periods of negative performance on a regular basis as soon as you move from cash to any other asset class. Even cash isn’t shielded from going backwards. With inflation running at over 5% per annum in Australia at the moment, and the big four banks offering 12 month term deposit rates of 0.60% per annum at time of writing, your cash is losing purchasing power of at least 4.4% per annum if you chose those term deposits!

So what to do? Whether you’re an accumulator or a retiree the approach is the same – stick to your plan.

Part 2: When markets head south

All market downturns are slightly different. This time both the growth and defensive parts of portfolios have headed in the same direction, down. This is not usually the case but has been the consequence of historic low interest rates. When interest rate expectations rise, bonds tend to fall in value. Unfortunately this has happened at a time when equities could have done with a hand up from their bond friends.

When market volatility eventuates, emotions will quickly become elevated. The first thing to do is stay calm.

The next thing to do is to review that plan you have (your Statement of Advice). Now comes the hard part – following through and sticking to the plan. As Mike Tyson famously said, “everyone has a plan until they get punched in the mouth.” For investors, a market downturn is a bit like getting punched in the mouth. What seemed like a good idea in the calm of a bull market, might suddenly seem folly when markets are in freefall. But that’s why we plan and write things down, because making decisions like these in the heat of the moment is a recipe for failure.

Selling at a low point in markets can crystallise an actual loss of capital. Doing so ensures you’ll never get this back. What about re-entering the market, Dan? I can do that. Of course you can, but can you pick the bottom? By the time you calm your nerves and reenter the markets you will have most likely missed a good part of the recovery, if not all. What effect can that have on long-term performance?

Key message: market timing is great if you can get it right, but without a process the risk of getting it wrong is very high and, if so, it can destroy your longer-term returns.

The grind higher

Markets can sometimes fall very quickly, before recovering slowly. Or as it’s more commonly described among investors: markets go down the elevator and up the escalator.

Remember March 2020? The Australian share market fell by 36% in that month! It then recovered all of those losses and is 1,800 points higher than the March 2020 bottom at time of writing.

Let’s look at that and some other examples of market downturns to see how they’ve panned out:

As said previously, each market downturn or bout of market volatility is different and the lengths of time of the downturn and subsequent recoveries are different too. However, investment markets have been doing this for many, many years and they will continue to do so. Having a long-term plan, and importantly, sticking to it, is your way out of these downturns.

If you stick to your plan, you’ll likely do better than most. And hopefully you don’t lose too much sleep along the way.

Don’t lose that plan though. You’ll need it again someday.

If you have any questions regarding the content in this email, or would like to discuss this or your portfolio in more detail, feel free to give me a call on 03 5227 7777.

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Aged Care is an extremely complex area but planning ahead and obtaining professional advice and help you make the best financial decisions for your loved ones. Below are the answers to the most commonly asked questions about Aged Care.

As people live longer, an ever increasing number will end up in aged care. The number of people in permanent aged care in Australia is expected to triple in the next 35 years, from 225,000 today to 700,000 in 2050.

The aged care industry is very complicated and many decisions must be made, often involving large sums of money.

The following is a list of the most common questions that we hear, and the answers to them.

1. Why is aged care so expensive?

A: Aged care is very labour intensive, and land and buildings are expensive to buy and maintain. The owners of such facilities expect to make a return on their investment. From a client’s point of view, typical fees include accommodation deposits and charges, daily fees, extra services fees and means-tested fees.

2. Is the accommodation deposit negotiable?

A: Yes. Accommodation deposits (known as RADs or Refundable Accommodation Deposits) can be as high as $2 million to secure a bed in an aged care facility. In many cases, these RADs are negotiable and at times can be as much as halved. Willingness to negotiate on RADs depends very much on the demand for beds – and the supply of beds – in a particular aged care facility.

3. What alternatives are there for paying the RAD?

A: Many aged care facilities prefer the RAD be paid as a lump sum up-front. However, it is possible to choose to pay interest payments only or pay with a combination of lump sum and interest payments. A bank guarantee is not an alternative.

4. Will the family get all of the RAD back?

A: In a government accredited aged care facility, the accommodation deposit is fully government guaranteed. Before July 2014, the accommodation bond repaid to the family would be reduced by retention amounts deducted by the aged care facility. Since July 2014, any lump sum paid as a RAD is now generally repaid in full, 14 days after a person leaves the facility, or where the resident has passed away, to their estate when probate has been granted.

5. Why does the Government charge different daily care fees to residents?

A: The standard daily care fee for a resident in an aged care facility ($58.98 per day) is set at 85 per cent of the full Age Pension. All residents must pay this fee. However, it does not cover the full care costs of the resident. The Government may ask the resident to pay an additional amount as a means tested fee and then pay a subsidy for each resident’s care needs to make up any shortfall.

6. What is the Means Tested Fee?

A: The means tested fee is set by the Government and collected by the aged care facility based on an individual assessment for each resident. It is an attempt by the Government to ask residents with the financial capacity, to contribute to the cost of care. This fee can range from nothing to a maximum $400.08per day.

7. What is the Extra Services Fee and should I pay it?

A: The Extra Services Fee, which can be as much as $120 per day, is supposed to give the resident extra services, including more activities and access to additional services like podiatrists and hairdressers. If your aged care facility is charging an Extra Services Fee, you should ask what services are being delivered and assess whether or not you are receiving value for money.

8. Paying daily fees will impact on my cash flow. What strategies are there for dealing with this?

A: It is possible to negotiate to pay some or all of the daily fees from the RAD to minimise the impact on your cashflow. This means, of course, that less of the RAD will be returned at the end of the care period.

9. What implications are there for my social security or pension?

A: The RAD is an excluded asset for social security purposes. Therefore, in some cases, where existing cash is used to pay for a RAD, it can result in a new or increased pension entitlement. More often, a family home is sold to fund the RAD. In this case, while the home is excluded, the proceeds from its sale are counted as an asset. As a result, the cash remaining after paying the RAD can often result in a pension being reduced or lost entirely. However, there are ways to maintain, or even increase, one’s current entitlements.

10. Will I need to sell the family home to pay the RAD?

A: Not necessarily. Four key questions are:

• Do you need to sell the home?
• Can you afford to keep it?
• What happens if you rent it out? and
• Will your decision have an impact on any pension or aged care fees?

The family home is often a couple’s most valuable asset and many people wrongly assume that it needs to be sold to provide funds for RADs. The key driver is to make sure that, like any valuable asset, the home generates a financial return. This return takes the form of rental income and capital growth (which RADs certainly don’t provide). The home is treated on a concessional basis for the Age Pension and aged care fees.

For Age Pension purposes, if you move into care the former home’s value will be excluded from the Age Pension assets test for two years, although any rental income will be assessable under the income test. The value of the home is capped at $162,815 for aged care means testing and any rental income is assessable.

Source: Money and Life by the Financial Planning Association of Australia

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