Asking Sara: Silver linings and positioning for growth

The below question from Kate in Fremantle was originally asked on the Adviser Ratings site and answered by our Principal Adviser, Sara Millard.

We’ve reproduced it below for your benefit.

As a young person/mid lifer accumulating super and whose retirement is some way away… What are the positives of this market fall and how can I ensure I am positioned to benefit from the growth post COVID 19?

– Kate from Fremantle

Dear Kate,

I am happy you asked that question and have had the foresight to see that there may be opportunities to benefit from such an unprecedented event, especially for young or mid-life accumulators.

There are a couple of key positives that can occur when investment markets fall:

1. It’s a great opportunity to be a part owner of some very reputable companies at a low cost.
2. A falling market gives investors invaluable experience. Living through a significant market decline can provide a front-line opportunity to understand how you manage your own emotions, and potentially make more informed decisions about your wealth creation moving forward.

I always say the best way to position one’s self to benefit from the growth past a market fall is to be aware of how investment markets operate. Have a basic understanding of the types of asset classes that are available, i.e. shares, property, alternatives, infrastructure, fixed interest and cash and their correlation with each other.

Another way to benefit from growth post COVID-19 is to understand the underlying characteristics of different types of growth funds. For example, some will focus on capital growth only and others will focus on capital growth and income.

Be careful of trying to pick the market, and the right time to invest during periods of volatility. Some of the best economists who study the markets every day can get it wrong. Ensure that you have surplus cash flow available to invest and be aware of the suggested time horizons for the specific investments you are considering.

There are ways of buying into investment markets when they are volatile and leveraging the investment risk. These include:

• Making regular contributions rather than trying to time the market with a lump sum contribution;
• Reinvesting Income, which hen your accumulating wealth via Superannuation naturally occurs; and
• Investing in Investments that are classified as ‘Highly Recommended’ by a reputable research house.

Kate, a key thing to be aware of is that markets move in four phases; and that understanding how each phase works and how to benefit from these different market cycles can have a huge impact on your potential success. These are:

1. Accumulation Phase – usually occurs after the market has bottomed out, where potentially the worse is over, valuations are attractive, and investors are buying.
2. Mark-Up Phase – usually occurs when the market has been stable for some time and the cost of the underlying investments are higher.
3. Distribution Phase – usually occurs when sellers are dominating the market.
4. Mark-Down Phase – usually occurs when the cycle is most painful for those who still hold positions, and their current valuation is less than what they paid for them.

A cycle can last anywhere from a number of weeks to a number of years, depending on the market in question and the time horizon the investor has.

You can read Sara’s original response at Adviser Ratings here, and if you are a client of Sara’s you can always leave a review at Adviser Ratings.