- Access to cash
Depending on your sources of income you may have minimal to extreme disruption in your cashflow. Fixed interest securities, government pensions and annuities will continue as before but sharemarket and property investments have been hit hard.
You should ensure that you have enough cash to cover 3-6 months of living expenses. If you have done this then you are in a good position to get through the crisis.
If not, we can help you to figure out how to make your portfolio more liquid without realising too many losses.
If your assets have gone down in value you may be able to qualify for the Age Pension or an increased pension payment.
- Update your budget
Before the crisis I thought that I needed a lot of money each month to be comfortable. Now that all my travel has been cancelled and restaurants are no longer open, I have found that I can get by on a lot less.
Once you find out that the amount of money you need is less, then your cash reserves start to look a lot more comforting.
If you need help with this, we have some excel spreadsheets that can be used to make a budget by downloading your credit card transactions.
If you have too much money coming in it might make sense to reduce your Superannuation Account Based Pension payments. The government will temporarily reduce the minimum required payment.
- Reassess your spending requirements
If your budget still looks daunting there may be some things you can do to cut back.
- Are there any memberships/subscriptions that are no longer available and can be cancelled?
- Can you reduce some of your insurance cover to save money?
- Petrol, public transport & lunch money won’t be necessary when you’re stuck at home.
- Restaurant meals are also unlikely to be back for a while.
It will take a while before life goes back to normal so don’t even think about going on a cruise and maybe you won’t be taking any trips to Bali until next year either.
- Don’t try to sell long term assets in a down market
The market for all growth assets has crashed now. It’s too late to sell as there won’t be any buyers and the market might not fall much further than where it is now. Eventually prices will recover and you will generate a reasonable rate of return going forward.
When liquidity is low you are forced to take a bigger discount and wait longer to sell assets. It’s better to wait until the situation has improved.
Also, if you go to cash now, it is most likely that you will not get back into the market until after it has risen substantially and you will be worse off than staying put.
- Don’t make big financial commitments while uncertainty persists
This crisis has only been real to us for little more than a month and still has a long way to go. We might not be out of it for another 1 -2 years. It is likely that things will get worse before they get better.
While it’s tempting to think that you can buy assets for cheap now, it’s too early to do that. Most people haven’t really come to terms with the true extent of the problem and an orderly market for some assets doesn’t exist right now.
Also, there is a lot more bad news to come and every crisis has aftershocks (e.g. the Greek debt crisis after the GFC).
Opportunities will present themselves but it is best to wait patiently for them.
- Do some sensible re-balancing
It definitely makes sense to review your portfolios and ensure that they are at the right balance for your risk tolerance. Most people have a better understanding of their risk tolerance after the market crashes than before it. Maybe you want to trim down your exposure to growth assets.
Alternately, now that the market has crashed maybe your allocation to cash & bonds is too high.
- Be realistic about the changed market circumstances
The interest rate on a bank account is now 0.25% or less. US government Bonds are priced at a negative yield to maturity. Any investment that is offering a higher yield than that involves risk. It is a mistake to think that any investment is a guaranteed winner. There are many business owners who now wish that they had spent more time thinking about how to manage the risks in their business.
Up to now many people have assumed that Sydney residential property was a safe investment (Safe as Houses, Bricks & Mortar etc). There has been a precipitous drop in demand for residential rentals in many parts of Sydney. At the same time supply has increased due to the mass cancelation of AirBnB bookings. Landlords are slashing their rents and still unable to attract tenants.
If you own a rental property and your tenant has an expired lease (i.e. on month to month), you should seriously consider offering them a 20% rent reduction in return for signing a 12-month lease. If you don’t do this they will go elsewhere and you could have a vacant property for the next six months or longer. The Sydney property market won’t go back to normal until 2021 at the earliest.
Demand for commercial premises will be very low for at least 12 months. Many shops are now closed and may never return. Companies are going to decide that they like it better when their staff work from home and they can save money by not renting a large office. If you own a commercial property, ask your tenants to make you an offer for how much rent they can continue to pay. If you insist that they pay the same amount of rent they will move out at the earliest opportunity.
What to do next?
If you have time on your hands now is the chance to do some things that you have been putting off.
They might include:
- Review your existing Centrelink benefits, superannuation and other financial arrangements.
- Get a financial plan put in place to implement once normal life resumes.
- Update your Will, Power of Attorney and Super fund beneficiary nominations.
We are happy to offer a free 30-minute Zoom or Skype consultation to help you get started.