Sunday 24 May 2020

Decided to rebalance our SMSF after all

Despite expecting the economic impacts of the Global Covid-19 crises to be severe, we've decided that since we'll have to head back towards our long-term asset allocation (the Vanguard High Growth Index Fund) eventually, we may as well start shifting a portion of our SMSF investments out of the Bond and Conservative Funds and back into the High Growth Fund.
I had initially been considering shifting to 50% High Growth Fund, 35% Conservative Fund and 15% Bond Fund, but as the management fees are higher for the first $100K in each fund, we'll pay slightly lower fees having only two fund investments rather than three. So after a quick 'trustee meeting' of myself, DW and DS1 (the three SMSF members), we decided to just switch to 50% High Growth Fund and 50% Conservative Fund.
This means that overall our asset allocation has changed from:
up to 20 Feb:    100% High Growth Fund    = 90% Growth/10% Income
Feb-May:          70% Conservative Fund/30% Bond Fund = 21% Growth/79% Income
25 May:            50% High Growth Fund/50% Conservative Fund = 60% Growth/40% Income
By being only 20% invested in growth assets from Feb-May we avoided much of the investor angst experienced in late March, but don't want to sit 'on the sidelines' until the stock markets have fully recovered. Putting some of our SMSF investments back into growth assets while the markets are still down ~15%-20% looks reasonable from a long term perspective (the market may well suffer futher declines, but as we'll be invested for many decades such 'blips' have to be tolerated).
The US S&P and Australian AllOrds Indices dropped about 35% from 20 Feb to the lows around 23 Mar, and since then the US S&P has recovered to be 'only' 13% below the 20 Feb level, while the Australian market is still roughly 23% below the Feb level. Looking at past recessions the stock markets often continue to produce reasonable returns even when the 'real' economy is doing poorly, so waiting until the recession is over would probably not provide the best outcome overall.
Recent Australian and US stock market performance shows the deep Covid-19 dip and the rapid partial recovery:
While stock market performance over the past century shows that such sudden dips are generally a 'buying opportunity' in the long term:
Should we have moved back into growth assets earlier? Or sat for another 6-12 months in income assets? Only time will tell, but you can only take your best guess and live with the result. Deciding to do nothing at all is still a decision...

ps. I got a call from Vanguard a few days after I mailed in the switch form, asking for clarification as I'd only filled in the % I wanted after the switch (I had assumed they would work out the most efficient way to shift my current asset allocation to the new ratios, but no, they need explicit details of what to sell and what to buy.) I explained that to minimize transaction costs (the buy/sell unit price differential) I didn't want to sell all the Conservative Fund units and then rebuy half of them! So we worked out that I could sell all the Bond Fund units and 25% of the Conservative Fund units and invest the proceeds 100% into the High Growth Fund. After checking with the processing department, the rep said they I would have to fill in a new switch request form, with those details filled in, so I had to quickly complete a new form, get DW to sign it, and scan and email it back via the 'secure email' service I had to register to use. Unfortunately I filled the form in too quickly and accidentally ticked 100% into the Growth Fund rather than the High Growth Fund! D'Oh!

Ah well, we'll be switching back to our long term allocation of 100% High Growth once the current volatility has settled down, so for the time being I'll just leave us allocated 50:50 in the Conservative:Growth Funds as it won't have too much impact on this year's performance (and it might turn out to be good to remain a bit conservative).
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