Fear, greed and the evolution of money in the age of the coronavirus pandemic

The COVID-19 pandemic is not going to end soon. Fear and anxiety have skyrocketed, people are scared, anxious, depressed, on edge and struggling to sleep through the night.

We watched as China took extreme measures to improve the coronavirus crisis there. We watched as Italy locked down the country and people scurried to other parts of Europe. We then watched as New York became the epicentre of the crisis. In places like Singapore, which did a good job containing the virus, they got comfortable and went back to work, and we saw reinfection. The same thing will happen around the world. In Australia, the number of cases has been far below many of our peers yet we are reluctant to relax social distancing for fear of a second wave of infections, making it hard to call when a recovery might start.

An economic downturn has been expected for a while, and the International Monetary Fund has declared that we are in a recession, but the numbers suggest we are in a depression. We’ve seen the ghost cities in China and how its economy was so heavily invested in a real estate bubble that will one day pop. We’ve seen the national debt skyrocket here in Australia. All that is just the tip of the iceberg. Fear, uncertainty and doubt are wreaking economic havoc.

Now, add the coronavirus to the mix. It has exacerbated the situation. As the Australian government announces a $320 billion stimulus package into the economy in the fight against COVID-19,  the federal government debt level hits its record high. The debt-based world we created can’t be saved. There is no doubt that we would be feeling the pain many many years after.

The situation will change human behaviour. Once this is all over, the world will look very different. We have no control of the economy or market, but we can think about what we can do now, on an individual level, to protect ourselves and our financial security in the future.

Here are some of the questions that I am getting asked and my responses:

Should you claim the early release of super of up to $10,000?

If your only option is to sell shares worth $3,000 in your super fund at $2,000 to feed your family, you sell the shares at $2,000. It doesn’t matter if you think it is going up or down because if you’re not here tomorrow then it doesn’t matter.

Near a million Australians have registered their intention to redeem their superannuation early. This would have undoubtfully a major impact on their own retirement income as well as the share market as a whole. It is because most super funds don’t fancy the idea of holding a large amount of cash (unless you tell them to). So when tomorrow (20th April) comes, and the funds receive withdrawal requests, they would have no option but to sell shares at a low price, resulting in a loss in the member’s investment value. If the number of claims is big enough, it could even trigger a market downturn.

The best course is obviously avoiding withdrawing if you can. If you have no other options but to withdraw it, consider making it up next year by contributing it back and minimising the gap when you can afford to. Please make sure you talk to me or an accountant before making any decision and not risk being caught up in a tax loophole.

If you are still employed, that’s fantastic. As all the little bits and pieces of your employer contribution going into the super fund are already buying assets at a really low price. You could be winning by doing just about nothing. Most asset prices are low at the moment, and it could be a good time to buy if you have the capacity. In the long run, the share market has always outperformed all other major assets including properties, so buy now and hold it for as long as you can (at least 7 years) could be a winning strategy.

The market could still come down, especially after next week as people sell shares to withdraw from super, but it’s important to remember you are not supposed to be a trader trying to “time” it at the perfect point – that is a proven failing strategy for the long term, as over 99% traders have tried and failed, and even the best of us couldn’t get it right every time.

Is there still a “safe haven”?

The RBA cash rate is now at 0.75% pa, 10-year Australian government bond yield is below 1% pa, in some European countries, it’s even negative (and insurance companies are having to buy them as required by law – very funny).

Traditional “safe” investments are losing their value and even producing lower than the inflation (currently at 1.9% pa) return, so the real returns of these so-called “safe” assets are actually negative.

Can you see the problem here?

Prices of the so-called “safe” assets could be manipulated in a way the government or the Reserve Bank needed to, through a range of monetary and fiscal policies (the “toolbox”) to protect the economy.

As we recover from this crisis, the public might want more transparency and control. Around the globe, people are talking about cryptocurrencies such as bitcoin, as well as other commodities that can’t be reproduced by any government such as gold. Gold and cryptocurrency could become the next popular alternative to cash, as people start to crave for more transparency and less government intervention of “defensive asset” prices.

Is there any other way to protect your income?

We help a lot of clients with Income Protection insurance, but this is not the only way to protect your income, although the insurance could be covering millions of dollars worth of your future income. Most Income Protection policies cover 75% of your income if you can’t work due to accidents or illnesses, that means if you were laid off, or your work hour reduced because of a pandemic, the insurance won’t cover it unless you were infected with the disease which made you unable to work.

The best income is the income that you don’t have to trade your time and freedom for, such as interest, dividend, rental income, business income without yourself actively involved in the day to day operation, and any other investment distribution. So the best way to protect your future income is still a combination of insuring it and building income-generating assets at the same time.