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Market volatility – what it means for your super
There has been extensive media coverage over the last few months on the significant falls in global sharemarkets, primarily triggered by concerns of a potential slowing of global economies due to the credit crisis.
This volatility has meant that for the first time in several years a number of our options have shown negative returns.
At QSuper we understand that seeing much lower short-term results for super can make many people nervous. So to help you better understand some of the issues surrounding volatility and separate the myths from the facts, we are addressing two of the most common questions we have been receiving from members.
A lot of my super is invested in shares. Should I switch to a more conservative option such as Cash?
Only you can make a decision on whether to switch your super to a different investment option, however experts advise against panic switching. Fear is often the most dominant emotion when markets start to tumble, but the most important thing to remember is that by switching or withdrawing from your current investment options you may only crystallise your loss – because once you’ve made a switch you won’t benefit if the value of the option then rises again. Super is a long-term investment, and with any investment low returns are to be expected in some years.
The graph below shows the potential long‑term pitfalls of switching at the wrong time, with the red line showing a portfolio that started off with a balanced mix, but which moves into 100% cash after any negative financial year and doesn’t move back until after the balanced mix has generated one financial year of positive returns. As you can see, over a 50-year period and on $1,000 originally invested, this portfolio returned over $50,000 less than the one that remained invested using the Balanced mix. Of course it’s important to remember that with an investment horizon of 50 years this example is not representative of your super investment. Rather it is designed to give a ‘bigger picture’ overview of the long-term effects switching at the wrong time can have.
Naturally there are always occasions when switching will prove to be appropriate, and you should review your strategy from time to time to make sure it continues to line up with your investment time frame and attitude to risk and return. The most important thing to remember is never to act on impulse and, if in doubt, seek personal financial advice.
What effect will these negative returns have on my super in the long term?
Sharemarkets are by nature cyclical, and are a perfect example of that cliché ‘what goes up must come down’. After several years of very positive growth, it’s natural to expect a period of much lower returns. Super funds always factor this into their projected long-term growth. We expect our Balanced option to experience a negative return on average once every six years. Of course it can be distressing to see the growth of your super stall, or even fall, in a given year, but you have to remember that this is just a small part of the bigger picture. In fact, a recently released report from independent ratings company SuperRatings showed the five-year return for our Balanced option as at 30 September 2008 returned 9.55% per annum.1 This result not only placed us in the top ten best‑performing funds in Australia for this period, but is significantly higher than our Balanced option objective of a return of CPI + 4% over rolling five‑year periods.