Cost of living crisis – unless you get married, have triplets and lose your job, don’t stop investing

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  • Experts fear cost of living pressures may see many Australians reduce or put on hold investments strategies
  • Australians advised not to delay or stop investing because of rising costs of living or global market volatility
  • Experts say only change course if your circumstances change and don’t respond to short-term noise

So what do you do when you start to feel the pinch of cost of living pressures? Everything from fuel, mortgage repayments, food and essential services are rising as record inflation starts to take a toll on Aussie households.

The US has reached its highest level of inflation in the last 40 years with headline inflation now at 8.3%. The Australian inflation rate is 6.1%, which is the highest recorded since 1990, and it is expected to peak at 7.75% by the December quarter.

To contain inflation the Reserve Bank of Australia (RBA) has lifted interest rates for the fifth month in a row, increasing the cash rate by 0.5 percentage points to 2.35% at its latest September meeting, a seven-year high.

As cost of living pressures and interest rate rises start to impact Australians, experts have become concerned that one area which might be cut is investing.

The CBA has warned of a lag in interest rate pain, meaning many home loan borrowers felt the impact of the central bank’s May rate rise only this month.

AFA Group Wealth founder John Cachia told Stockhead people are starting to worry where will they find the extra money to live and meet their financial obligations.

“What we are finding is people coming to see us as new clients or even existing clients asking about whether they need to change their investment strategy by reducing or stopping regular investing to maintain mortgage repayments,” he said.

“Fortunately, we’ve built buffers into our plans to allow for increases in interest rates along the way but what is more concerning is prospective clients… they have not done so.”

He said it was quite concerning that in a short period of time people are automatically looking at changing their investment strategies.
 

Now not to time to change course

Markets have remained mercurial all year with another tough bout this week on the back of US inflation figures. On Wednesday ~$60 billion was wiped off the ASX following sharp falls on Wall Street as investors feared more rate hikes to combat inflation.

The ASX finished the week with more sharp falls on Friday as the World Bank warned of a global recession.  The S&P/ASX 200 ended the week more than 2% down.

“For me it’s a matter of is now the right time to be making changes to your investment strategy with markets across the board down?” he said.

“If you look at overseas markets they average about 15% and the Aussie market is about 10% down and as we are talking there’s a significance decrease.”

But Cachia said with the declines now was actually the time to be working to try and maintain or even increase an investment strategy.

“Stocks are a discount to where they were at the start of this calendar year meaning that these regular investment strategies are buying more units, so as much as you might be looking at amending or stopping your investment strategy you need to be looking at other ways to save money before you go altering your long-term wealth creation plans,” he said.
 

Find ways to maintain investment strategy

Cachia said in difficult economic times people should instead consider other strategies to increase household cashflow including:

  • Potential to earn more money
  • Spending less on non-essential items
  • Revision of goals

Cachia said revising goals doesn’t mean investing goals. Rather, maybe reconsider whether you really need to go on fancy holidays or upgrade a car every two years.

“Investing is a necessity to ensure that at one point in time you no longer need to trade time for money so you shouldn’t be cutting necessities,” he  said.

“People need to understand the impact of stopping or reducing investing  because not only are they not taking advantage of discounted markets but the power of regular investing is you will buy some on the low, some on the way up.”

Cachia said regular investing makes the most of risk mitigation strategy dollar-cost averaging, which can reduce the overall impact of price volatility and lower the average cost per share.

“As we know it’s time in the market and not timing the market that matters and in the current market, to quote Warren Buffett, ‘be fearful when others are greedy, and greedy when others are fearful’,” he said.
 

Unless you’re having triplets and get fired, stay the course

Online investment management service Six Park co-founder and CEO Patrick Garrett said a lot of time investors will tend to sell on negative news.

“If you have a medium to long term outlook, let the portfolio do its thing,” Garrett said.

“If you get married, have triplets and get fired all at once then your risk profile has probably changed and you may need to rethink things, so we are not saying don’t ever change anything.

“We are just saying don’t read all the headlines and say ‘I’ve got to do something or I’m out’.”

Garrett said when the markets tank, a lot of investors sell near the bottom and then as they recover they get back in so they sell low and buy high.

“That’s what frequently happens but we counsel our clients that if your personal circumstances or medium to long-term investment outlook fundamentally changes you may want or need to act,” he said.

“But being overly focused on short-term gyrations and the noise that surrounds them is akin to jumping at shadows and history suggests from an investment perspective that leads to relatively poor outcomes.”