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Over the last couple of weeks the major super funds have generally been proactive in communicating with their members about what the recent Coronavirus-related sharemarket falls mean for Australians and their super. This is understandable since the news headlines can cause considerable concern and panic for many people, and they only tell one side of the story.
In this article we’ve summarised some of the key points that the major super funds have been passing on to members.
There is a lot of uncertainty at the moment
Precisely how this virus will impact markets long term is not fully known. In an economically interconnected world though, there are concerns that company earnings in developed markets will be impacted as the virus spreads. Share markets across the globe have declined in recent days, pricing in this concern.
Although it is unexpected, it is also to be expected
Financial markets do not like uncertainty. What we are experiencing is not out of the ordinary. Over any 20-year period, we might expect 4 to 5 years where sharemarkets have a negative annual return. These periods of negative returns often occur after markets have had very positive returns. For example, the US stock market was up approximately 30% in the 2019 calendar year. And with the recent events, markets are back to where they were in the early part of the 2019.
The Coronavirus is having a similar impact to many other previous periods of uncertainty. The key issue for financial markets is the spread of the virus and the impact this spread has on the economy, due to restrictions on travel and decreased activity and demand for goods/services. To a large extent, financial markets have already priced a short, sharp downturn in economic activity. Likewise, financial markets are also pricing a substantial policy response from governments to support.
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We also have to bear in mind that we’ve had 10 consecutive positive years. So it’s almost the correction that we had to have.
Super is a long-term investment
We would encourage our members to be mindful that superannuation has always been, and will continue to be, a long-term investment. Accordingly, our investment portfolios are designed and structured to provide appropriate resilience and weather the gyrations presented by the unpredictability and instability currently being experienced in world investment markets.
Stay calm and don’t respond to every movement
Reacting to short-term market movements can negatively impact the long-term performance of your super. It risks locking in a temporary fall in the value of your investments and missing an eventual rebound.
Compare super funds
Be careful reacting to short term market movements. On Tuesday 10 March 2020, the Australian share market was up approximately 3%* following a very large fall on Monday 9 March, 2020.
Super funds are diversified
Most members in super funds (including MySuper) are invested in a variety of asset classes, not just the share market. Different asset classes perform differently over time which helps to even out the highs and lows of market volatility in a particular asset class.
Lower prices can mean buying opportunities
Historically, pandemic scares have been opportunities to buy risk assets at prices below fundamentals (as we saw in the case of SARS in 2003). This may ultimately once again prove true in this particular case, but markets could go either way from here and predicting that is impossible.
Commonwealth Superannuation Corporation
What should I do?
Broadly the recommendations from super funds can be split into two groups
- General comments – For those at least 10-15 years from retirement
- Those nearing or in retirement
Sometimes it’s best to do nothing
For those with 15, 25 years or more until retirement, this crisis is one of many they will experience during their working lives. The compensation for accepting the kind of short-term market turmoil we are currently experiencing is higher long-term returns.
A way to lose money in super after a downturn is to make changes that crystallise your losses. People avoid selling their house during a property market slump because they are worried about making a loss, the same principle should be applied to changing your super fund or investment option immediately after a market drop.
Industry Super Australia
Don’t try to time the market
While it may seem counter-intuitive, history has demonstrated that for those who are unlikely to draw on their super in the short-term, the best action is often to take no action. During the 2008 Global Financial Crisis (GFC), some members elected to switch to cash or very defensive options in search of lower volatility and stability.
Unfortunately, it’s next to impossible to predict when market confidence will return and recover. As such, attempts to mitigate risk by attempting to time market gyrations simply crystalised and in many cases exacerbated losses. By way of example, the share market fell some 40% in 2008-9, but recovered near to all that fall in the following 12 months, and subsequently went on to exceed the pre-GFC levels.
Review your risk level
Understand how much risk you’re comfortable with taking when it comes to how your super is invested and build this into your financial plan. You may want to consider regularly reviewing your financial plan to make sure it still reflects your current needs. For instance, if you’re moving towards retirement and your super is invested in a high-growth investment strategy, your level of risk may be too high.
Those nearing or in retirement
If you have an investment timeframe of two years or less, you might want to seek advice if you plan to change how your super is invested or your investment choice.
Review your investment option
It’s important to remember that we all hope to live a long time, and in order for our wealth to last as long as possible, we need to maintain some exposure to growth assets – such as shares. However, it’s generally not a good idea to have excessive exposure to shares – a sharp downturn just prior or just after to retirement can do significant damage to retirement plans.
For those members who feel they may be over exposed to shares and are very worried about the impact of this downturn on their retirement, they may need to consider moving to a more conservative strategy. However, there are two key things to remember:
- Recent negative returns from share markets follow years where share market returns were considerably stronger than longer-run norms. Moving to a more conservative strategy now, after markets have declined, locks in a loss of capital.
- A more conservative strategy by its nature delivers lower long-term returns, and is not likely to capture the full benefit when share markets eventually (and inevitably) recover.
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