In this guide
Talk of recession and stagflation refuses to go away, ignited by each new geopolitical crisis and share market gyration. From Covid to the war in Ukraine and, most recently, the US-Israeli war with Iran, investors are facing prolonged periods of nail-biting volatility and uncertainty.
Economic labels aside, the consensus from the (northern) spring meetings of the International Monetary Fund (IMF) and the World Bank, and echoed by market economists, is that higher inflation and lower growth are the new reality. Some countries may be better placed than others, but none can escape the global headwinds.
The challenge for all super fund members is to learn how to navigate the new normal, rather than react in a panic or do nothing and hope it goes away. For self-managed super fund (SMSF) trustees, there is an additional layer of responsibility.
One reason people sign on to run their own super fund is to take control of their financial destiny. Rather than leave investment decisions to professionals, SMSF trustees are ultimately responsible for their own investment strategy and are required to document it. While that means they are generally more engaged with their super, it doesn’t mean your investment strategy is ‘set and forget’.
To plan for changing market conditions, you need to know what you’re planning for. So first, some definitions.
Recession, stagflation, what’s in a name?
Recession
The most common technical definition of recession is two consecutive quarters of negative growth in real GDP (inflation-adjusted gross domestic product). GDP is the value of all produced goods and services. By this definition, Australia is not in a recession and hasn’t experienced one in 29 years, not since the early 1990s.
More generally, the Reserve Bank of Australia (RBA) says a recession can be defined as a sustained period of weak or negative economic growth accompanied by a significant rise in unemployment. Other indicators are weak household spending and business investment, and high rates of loan defaults and business failures.
Stagflation
A combination of high inflation, stagnant economic growth and rising unemployment. Stagflation is difficult to combat because the measure used by central banks to tame inflation (higher interest rates) results in weaker economic growth and unemployment. The reverse is also true, as economic stimulus in the form of higher government spending tends to push up prices and inflation. The last period of stagflation was during the oil shocks of the 1970s
The US-Israeli war with Iran and the disruption to supply chains for oil and other commodities have pushed up oil prices with flow-on effects throughout the global economy, simultaneously slowing economic growth. Uncertainty lies in how long these effects will last and the impact on financial markets, which are increasingly volatile.
Recession vs stagflation – what’s the difference?
The main difference is that in a recession, economic growth is negative and prices fall, whereas stagflation is characterised by weak growth alongside rising prices (inflation). Stagflation is rarer and considered more difficult to deal with.
Keep your eyes on the prize
At times of extreme market volatility, investing can seem like a gamble, but that’s short-sighted. History shows that in the long run, there are some fundamental investment principles you can rely on.
One is the power of compound interest and staying invested – both things that are hard-wired into our superannuation system, where your money is locked away for decades to fund your retirement. The other is diversification, so your overall investment portfolio can weather shocks to any one asset class or investment.
It’s not surprising that many investors think the wise course in a downturn is to take their money out of shares and higher-risk investments and put it in cash or low-risk investments until the storm passes. But that’s almost always a mistake. Even if you time your exit before a big market fall, you risk missing the inevitable rebound.
Australian Super recently gave these examples of what not to do when fear grips the markets, as it did in February and March 2020 when Covid hit and markets plunged.
Unlike big super fund members, SMSF trustees can’t flick a switch to cash, especially if they hold assets such as real property that take time to sell. But the temptation to tinker with liquid higher-risk assets and increase cash holdings is still there.
This graph from Vanguard (below) shows the impact of missing out on a handful of the best days on the Australian share market.
Annualised total returns of the Australian stock market from 2000 through 2025
Source: Vanguard
2026 SMSF calendar
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Missing just 10 of the best days reduces the annualised total return from 8.2% to 6.0%.
What’s more, Vanguard says the best 30 days account for almost two-thirds of the long-term return of the Australian stock market, and they’re often clustered near the worst days.
How to position your super
While experts stress the importance of holding your nerve when markets are volatile and commentators are openly talking about recession, that doesn’t mean you should do nothing. When it comes to your SMSF, a better approach is to kick the tyres, carry out necessary maintenance and ensure your fund is roadworthy for the bumpy ride ahead.
Here are some actions you may want to consider:
Review your exposure to risk
Is your asset allocation aligned with your age, time horizon and tolerance for risk? If you’re close to retirement and haven’t revisited your asset allocation recently, now is the time to do so.
As mentioned earlier, SMSF trustees are required to have an investment strategy that should be reviewed regularly.
There’s a fine balance between holding a meaningful amount of growth assets to last what might be decades in retirement and minimising the impact of a steep market fall around the time you retire (known as sequencing risk). Where you set the dial will also depend on whether you would prefer to err on the side of caution by positioning your portfolio more conservatively or if you are prepared to live with a certain level of risk.
Younger investors with many years before they retire might view a market downturn as an opportunity to add shares or other higher-risk assets to their super while prices are low.
Check whether your financial goals are achievable
If we are entering into a prolonged period of slower economic growth and higher inflation, are your financial goals still achievable or are they overly optimistic?
Test your retirement readiness with SuperGuide’s selection of retirement income calculators and video tutorials.
If there’s a gap between hope and reality, review your budget to look for savings.
Using the calculators in the link above, you can also model the impact of increasing your super contributions and/or working for longer.
For those close to retirement, start refining your retirement income strategy. Check out these retirement income rules of thumb to get you started.
Consider a bucket strategy
Most advisers recommend retirees have a cash buffer of one to two years’ worth of living expenses held in cash and term deposits. This ensures you’re not forced to sell assets into a falling market to cover your day-to-day expenses.
This approach can be taken further by using a bucket strategy, where you divide your super into three ‘buckets’ of assets. The first bucket holds cash and term deposits to use for pension withdrawals. The second medium-term bucket holds a mix of conservative and growth assets, which can be used to top up the first bucket, while the third bucket holds growth assets for long-term capital appreciation.
Stay invested, keep investing
As the graphs earlier in this article showed, investors are better off staying invested throughout market cycles and letting compound interest work its magic. This approach is often referred to as time in, not timing the market.
Market downturns can also be a good opportunity to buy quality assets at reduced prices. Or as legendary investor Warren Buffett famously quipped: Be fearful when others are greedy and greedy when others are fearful.
If you are hesitant about investing when others are selling or getting your timing right, dollar cost averaging into the market by making regular contributions to your super via direct debit takes timing and emotion out of the equation.
Diversify your investments
Diversification is one of the fundamentals of successful investing and is even more important in times of economic uncertainty and market volatility. If your portfolio has strayed from the target asset allocation in your investment strategy, and your targets are still appropriate for your age and risk tolerance, look at rebalancing.
Also be aware that even in a slower growth, higher interest environment, some investments and investment themes will do better than others. For example, companies with stable earnings or providing essential goods generally outperform in a recession. The oil crisis has also increased focus on themes such as renewable energy and electric vehicles.
To avoid trying to pick winners from losers, SMSF investors have embraced professionally managed funds, exchange-traded funds (ETFs) and listed investment companies (LICs), which can provide diversified exposure to market sectors and themes.
Seek advice
In uncertain times, independent financial advice can be invaluable. Not only for investment advice, but to help you develop an investment strategy and retirement plan tailored to your personal goals, risk tolerance and financial situation.
A trusted adviser can act like a coach, giving you confidence to hold firm, stick to your long-term investment strategy and ride out short-term market turbulence. They may also help you recognise opportunities along the way.
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