With a recession seemingly imminent, many investors are understandably concerned as they’ve seen their share investments drop in value, writes David Hancock.
If you’re worried about freeing up cash flow to weather the financial impacts of coronavirus, you may be wondering if it’s worth selling off some investments now or holding on and waiting for the bounce back.
Is this a good strategy?
The first thing to keep in mind is that any decision to sell should not be made in a panic. Panic selling is what has sent the sharemarket into freefall. In many cases, investors sell out of their investments at the lowest point, then will re-enter the market once it has recovered at a higher point, leaving them worse off.
However, it really depends on the investment and your independent circumstances. In the case of property, you may be thinking that the market will fall in the short term, in which case it may make sense to sell now and reinvest once the market drops.
One problem with this approach is the high transactional costs of selling and repurchasing property. Once you take into account agent fees, potential capital gains tax, stamp duty and solicitor’s fees, the benefits of flipping can often be eroded. Additionally, property has historically proven to be an attractive investment in times of stock market volatility and low interest rates, so the cost of repurchasing into the property market might not make this strategy viable.
How else can I free up cash flow?
There are several other ways to free up cash flow without needing to sell off your investments. Here are some options you may want to consider:
● Request a mortgage repayment holiday from your bank or lender. Talk to your mortgage broker to organise
● Drop non-essential regular expenses such as regular subscriptions such as magazines
● Cease any voluntary super contributions. You can resume these at a later date when you no longer require the cash flow
● Negotiate with your providers to pay annual bills in more frequent installments. That way, you won’t be hit with a big bill at once, preserving your cash flow in the short term
● Move personal insurances such as income protection, life insurance and TPD insurance into your superannuation. The costs will be paid from your superannuation balance, freeing up cash flow. Talk to your financial adviser to see if this is the right option for you and to discuss the impacts
● Reduce the number of days your children attend daycare or take them out completely to reduce your costs
● If you are self-employed, you may be able to set up a payment plan with the ATO to pay tax in installments or arrange for a payment holiday during this period
● You may be able to vary your PAYG installments if you think the current rate will result in you paying too much tax for the year. By varying this, you free up the cash now rather than having to wait for your tax refund
Of course, sometimes selling down an investment could be the best option. While it’s best to have this as a plan B, depending on an individual’s circumstances, it could be good to have a safety net. The best thing to do is to review your individual financial situation and forecast, ideally with a financial planner, to ensure you have a clear strategy going forward.
N.B: At the time of writing, this advice was given on current circumstances. This may change as circumstances or government advice changes
David Hancock is the director of Montara Wealth.