"Should my financial adviser have been cashing out shares in my super portfolio this year, prior to the current crash? Allowing a buy back in now at a lower price? I am retired and honestly shocked no trading has occurred on my account. It seems a lost opportunity."
-Question from Lisa in South Australia
Top answer provided by:
Ryan Hateley
Hi Lisa
This is a great question and one in which there may be several factors at play.
Long term investing is a disciplined exercise. Selling out when the market is at a perceived high can have consequences and risks.
Timing Risk
Sometimes the market continues to drive higher, and a greater gain can be lost from having pulled out too early. Conversely, timing when to invest back into the market is just as perilous. When is the bottom? You might need to consult your crystal ball.
Capital Gains
In addition to this, considering the recent market movement over the past few years, which has been largely positive, it is likely the shares in your superannuation would have experienced a significant capital gain prior to the recent downturn. Capital Gains are taxed concessionally in superannuation accumulation accounts, at only 15% on an asset held less than 12 months, and a reduced rate of 2/3rds on assets held longer than 12 months.
For example, a capital gain of $100,000 made over the past year several years would be reduced to only $66,666, resulting in a tax hit of $10,000 (rounded up) which could be quite an impact on a superannuation balance. With this tax to consider, the perceived upside would need to be greater than the capital gains tax hit.
I will note that clients in Superannuation Income Stream/Pension accounts may not have to pay tax on income or gains, depending on the account.
Transaction Costs
In addition to this, to sell out, then purchase back in, would also trigger brokerage costs, which on a lower balance account would be counter productive. There may be other transaction costs, or switching fees, depending on your fund.
Potential Strategies:
There are ways that one might be able to take advantage of this market situation.
Using the Cash Account
One strategy might lie in how the dividends/distributions and superannuation contributions are paid into your superannuation fund. These could be directed to the cash account, building up a cash reserve which then allows you to take advantage of a drop in the market should one arise. This still comes with timing risk.
Dollar Cost Averaging
This strategy works by making regular investments into the market over a period of time. If there is no certainty that the market will stabilize, then making regular investments into the market may increase the positive impact of these investments, especially during a falling market. This can help spread out the timing risk.
Reviewing your Investments
New market conditions can sometimes mean new opportunities in different sectors. Some sectors that have been running hot, may now go cold, and new markets may become more attractive, for instance where the impact of Tariffs is unlikely to make a major difference.
So, it’s not necessarily a missed opportunity to not cycle your investments when they are at their peak, especially if you intend to buy back into the same or similar markets.
I recommend speaking with your adviser about opportunities that may now be arising from the new market conditions, or managing your existing strategy.
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