A different form of distancing

We are all having to learn new socially responsible and acceptable ways of behaving.

Social distancing, in a few short weeks, has gone from an abstract notion more applicable to strangers than friends and relatives to having a hard spatial definition – 4 square metres to be precise.

At times like this there are many, many things more important than investment portfolios or your favourite sporting code.

The lines of people outside Centrelink offices this week spoke volumes for the real-world economic impact the coronavirus is already having on everyday Australians.

It also provoked an eerie resemblance to the queues outside banks in northern England during the global financial crisis, where a family holiday had coincidentally provided a close up view of the panic caused by the collapse of the Northern Rock bank back in 2008.

Past performance, as we all know, is no guarantee of future performance. But history also provides the only tangible data points for us to provide context for what is happening. History may not repeat itself but it certainly rhymes from time to time.

The COVID-19 virus presents a very different challenge than the global financial crisis because it is a public health crisis rather than shock to the financial system, and Federal and State government responses reflect that.

The move by the Federal Government to allow access to up to $20,000 in superannuation – while controversial on some levels – is a good reminder that the funds in superannuation belong to the members and the ability to access funds on hardship grounds will help some of the most severely affected people get through the coronavirus shutdown.

For those people fortunate enough to have the financial resources to weather the storm there remains the issue of what, if anything, to do now. The one lesson that we can take out of the global financial crisis was that people who exited to cash then missed the market rebound. In the short run there may have been a sense of relief at being out of the market’s volatile swings but over the medium term, as markets stabilised and then recovered, portfolios that had headed for the safety of cash did not keep up.

Market timing – particularly at times of severe stress and uncertainty – is akin to trying to catch falling knives as markets whipsaw around. There is also the fundamental challenge that exiting involves not one but two decisions. In many ways the decision to exit is the easier one. Much harder is the decision around when to re-enter. Discussing your concerns and revisiting your plans with your financial planner or partner might be a better first step.

It doesn't mean losses – even if only on paper at this stage – don’t hurt. They do. In fact, losses hurt more than an equivalent gain gives us pleasure. Behavioural finance experts, like Professor Daniel Kahneman, call that the coefficient of loss aversion. So you are not imagining it when your portfolio slumps 5% and the emotional pain feels stronger than the joy you get when it goes up 5%.

Times like this remind us why the argument for diversifying your portfolio across the full range of asset classes and setting the asset allocation in line with our risk profile and investment goals makes such good sense. It can help temper the emotional impacts and allow you to sit tight and weather even a pandemic storm.

While out walking at the weekend, I heard a couple discussing their superannuation balance. One person was clearly rattled and talking about having to continue working. Their partner made a bold suggestion – why don’t you stop looking?

Perhaps that is another form of social distancing we can practice – keep a healthy distance from that account balance until markets have returned to something resembling normal service.