Why super is a long-term investment

Superannuation helps you build retirement savings so investing in the right mix of assets and keeping a long-term view is a smart strategy.

Everything was ‘unprecedented’. The extent of the pandemic. The number of cases and deaths. The level of lockdown restrictions. The scale of Governments’ responses.

But the reaction by global share markets wasn’t unprecedented. Nor was it unpredictable. It was arguably a knee jerk response to a sudden deterioration in business conditions and consumer confidence while markets awaited the impact of monetary and fiscal policies from global governments and central banks.

By their very nature, share markets always have and always will experience periods of volatility. They go up. They fall. They recover. It’s a continuous cycle. Over the longer term, shares may provide better returns for investors than investing just in cash or bonds.

Markets go up and markets come down

Despite periods of volatility, 2019 may be seen as one of the best years for equity returns in decades1.

But in early 2020, investors were shocked by the speed and extent of COVID-19’s impact on global share markets, and in turn, on their superannuation. Significant declines in March rebounded strongly in April, led by the US, where the Dow Jones posted its strongest monthly performance since 1987. In Australia, the ASX 300 enjoyed a strong 9% gain2. Investors were encouraged by the support from Governments and central banks to mitigate the economic damage, as well as the decline in new virus infections.

Historically, share markets always correct themselves after a fall – and now should be no different. Take a look at the chart below, which shows market trends since 1970. The black line indicates a bear market, or when the market moves in a negative direction. The blue line shows periods when the market moves continuously in a positive direction – a bull market. The average bull market has lasted 70 months, while the average bear market has run for 14 months.

This graph shows market trends since 1970. The black line indicates a bear market, or when the market moves in a negative direction. The blue line shows periods when the market moves continuously in a positive direction – a bull market. The average bull market has lasted 70 months, while the average bear market has run for 14 months.

As such, the current situation should be viewed as a normal part of superannuation given it is a long-term investment. Australian superannuation funds typically include growth assets, like shares and property, to generate growth over the long term. This is offset by an allocation to more defensive assets, like bonds and cash, which help smooth out returns over time and avoid exposure to too much short-term volatility. Younger members have more time to ride out market fluctuations and grow their balances, so generally have a larger proportion of their superannuation exposed to growth assets.

Avoid cashing out and locking in losses

In times of uncertainty, it’s natural to take a short-term view of your finances as you worry about living day-to-day. However, superannuation is there to help you build wealth for a life in retirement, not now. And as with any investment, selling at the wrong time can be costly.

Most people only look at their superannuation balance when their annual statement arrives. So, if it’s been a year that’s delivered negative performance returns, we know through experience that members panic and their immediate reaction is to ‘cash out’ investments for fear of losing more money.

However, when share markets decline, it’s generally not a good time to sell. As the price of shares fall, you’re potentially crystallising any losses and as you no longer hold the asset, you’ll also miss out on any opportunities that could arise when the market rebounds and share prices begin to increase again.

Remember, your annual statement is only a reflection of your superannuation at a point in time. If you look at your balance one day it could be down, and the next day it could be up because shares are down almost as much as they are up on a daily basis. So, by taking a long-term view, you’re less likely to make hasty decisions based on short-term bad news.

Make a commitment and stick to it

Investing in superannuation is a classic ‘buy and hold’ strategy. Create a portfolio that suits your risk tolerance, time horizon and investment goals and stick with it. Regular reviews of your chosen portfolio, or letting experts look after your investment by investing into a lifestage fund, will help ensure the balance of growth and defensive assets is appropriately adjusted over time to reduce your level of risk as you approach retirement. But otherwise, invest with confidence and don’t be tempted to interfere.

Maintaining regular investments into your superannuation, regardless of whether share markets are rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high. This should average out the price over time, and means you’ll potentially hold more of this asset when prices rise again.

Keep your superannuation working hard

If you’re close to retirement, or in retirement, and worried about the effect of recent market volatility on your superannuation balance, you may be interested to know that 60 cents in every dollar of your retirement income comes from the growth your investments make while you’re in retirement3.

Long-term investments like superannuation rely on the amount of time your investments are in the market. It’s not about trying to ‘beat’ the share market, predicting its movements and buying and selling accordingly.

According to Morningstar, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy4. This is almost impossible to achieve, even for investment professionals.

You’re more likely to miss some of the best days of the market rather than picking them correctly. In fact, global fund manager Fidelity found, a $10,000 investment that missed the 10 best days in the Australian share market during the period October 2003 to April 2020 would have cost you $13,523 in lost earnings5. The longer your money is invested, the more potential it has to keep growing, even once you’ve reached retirement age.

Stay positive

To achieve your retirement goals, remember that superannuation is a long-term investment strategy. Getting good advice and investing in a way that suits your objectives is essential. You’ll never be able to foresee what share markets will do or predict which asset class will perform best in any given year.

Always review your superannuation balance within the right context, reducing your risk of selling at the wrong time or investing too cautiously and missing out on growth opportunities

Next read: Five things to consider before accessing superannuation early

 

References:

1 BT Investment Solutions Monthly Commentary – January 2020 https://www.bt.com.au/content/dam/public/btfg-bt/documents/news-article-pdfs/January%20Market%20Commentary_V2.1.docx.pdf
2  BT Investment Solutions Monthly Commentary, April 2020
3 Super Guide https://www.superguide.com.au/boost-your-superannuation/investment-returns-retirement-understanding-103060-rule
4 Investopedia  https://www.investopedia.com/terms/m/markettiming.asp
5 Fidelity International https://www.fidelity.com.au/learning-hub/understanding-markets/timing-the-market/. The chart shows how a notional $10,000 investment would have been affected if the 10 best days were missed. Uses daily returns of the ASX/S&P 200 Accumulation index (Source: Datastream) for the calculations, from 31 Oct 2003 to 06 Apr 2020.

If COVID-19 has affected your financial situation, you may be able to access your superannuation early. Here are five things to consider before doing so.
While consolidating super might sound like an easy one to put off, sorting it could mean more money to play with in retirement.
Whatever your vision of retirement is, making the most of your retirement years is certainly something worth planning for.
Australians lost over $6 million to superannuation scams in 2019. How can you protect yourself from the scammers?


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 2 June 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 take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. All examples and images are for illustrative purposes only. Your portfolio value and performance are likely to be different and will depend on the investment options you have selected and the time period over which you are invested in those options. Past performance is not a reliable indicator of future performance.  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. Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investments held in superannuation. The Government has set caps on the amount of money that you can add to your superannuation each year and over your lifetime on both a concessional and non-concessional tax basis.  There will be tax consequences if you breach these caps.  For more detail, speak with a financial adviser or registered tax agent or visit the ATO website.