If you’ve checked your super balance recently, chances are it’s lower than it was at the start of the year. That’s because the value of the major share markets has fallen this year, due to investor concern about the impact of COVID-19 on the world’s economies.
Share markets have been volatile since the Australian economy reached an all-time high of 7199.79 points in February 2020. According to Canstar research, the value of the local share market declined by 20 per cent in March but rose by 8.1 per cent in the first two weeks of April alone. In the decade before the market’s February high, the market’s average annual return was 7.86 per cent.
As this shows, by their nature, markets rise and fall. This means, if you’re a long-term investor, like most people with superannuation are, short-term market movements may not be so important.
Diversification is one of the most important factors that helps investors ride through market cycles. This is the concept that by investing in a basket of assets, investors gain exposure to different asset classes – shares, property and bonds, for instance – and may be more able to ride out market cycles and reduce the impact of volatility affecting different parts of the portfolio.
It’s also important to be diversified within asset classes. For example, a portfolio of shares will include companies in a range of industry sectors such as banking, mining, consumer goods and transport. Having a diversity of asset classes and industries in a portfolio, in this case, might also help to ride out the market cycle.
As a rule, the further out from retirement you are, the more risk your portfolio may be able to take. This is because most investors need to absorb some level of risk to generate the return they’ll need to grow their retirement savings. Nevertheless, it’s still important to have some exposure to risk even when nearing and in retirement, as it could help to preserve and grow over time. An example of this is, if you’re in retirement and your portfolio is invested in cash, you have a smaller opportunity to grow a nest egg over time. But if a portion of your portfolio, even a small one, has some risk attached, you have the potential to generate some return even in retirement. This is important especially as we are living longer, which means our retirement savings have to last longer as well.
It’s easy to think it’s possible to pick the bottom and top of the market. But in fact, it’s only possible to understand when the peak and trough of the market have been reached once those milestones have passed.
This means it can be very risky to try to sell your investments at the top of the market and buy back in when you think shares are at their cheapest. Missing the top of the market can mean missing out on the gains to be made at this point.
Similarly, if you miss the bottom of the market, you may miss out on a subsequent upswing. Worse, if you sell when markets are at a low point, you will crystallise your losses.
Taking all this into consideration, it’s important to be invested in the market through different cycles. That way, chances of missing out on the gains you can achieve when markets are at their peak are lower, as well as not locking in your losses when markets have hit the bottom.
It’s impossible to be able to say when your retirement savings will be back at the levels they reached at the start of the year. What’s important is to be diversified, have some level of risk in your portfolio and ensure your retirement savings are being managed by a team that has a good track record of helping investors grow their retirement savings over time.
This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 26 May 2020.
This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not consider your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material referenced from third parties and derived from sources believed to be accurate at its issue date. No company in the Westpac Group accepts any responsibility for the accuracy or completeness of or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. BT cannot give tax advice.
For more detail, speak with a financial adviser or visit the ATO website.