Super fund members told to sit tight for share market recovery.
Australians contemplating retiring this year should not press the panic button over the rout on local and overseas shares this week, leading financial experts have told YourLifeChoices.
AMP Capital chief economist Dr Shane Oliver said yesterday that while markets had not seen the extent of the recent volatility “for a while”, the size of the falls was not unusual.
On Tuesday, the ABC reported that sell-offs on the Australian Securities Exchange (ASX) had wiped $60 billion off the value of shares.
At the start of trading on Wednesday, the market began to recover some of those losses and the ASX closed 9 per cent higher than the previous day.
SuperRatings chief executive Kirby Rappell told YourLifeChoices that the superannuation funds of most Australians would have fallen in value by around 2.1 per cent since the start of the week.
“For instance, a super balance of $100,000 on Monday would be about $2100 lower by Tuesday, with yesterday’s correction reversing some of those losses,” he said.
“For a member with a balance of $100,000 on January 9, the combined impact of Australian and international share market performance on their balance is -1.8 per cent or $1800 less.”
However, he said a member with funds fully invested in Australian shares would have suffered a loss of $3700.
“When there is a market drop, the balance of your superannuation suffers; however, it will only affect your retirement proceeds if you withdraw your funds, and is more of an issue for members nearing retirement,” Mr Rappell said.
“With the median balanced fund generating returns of 9.7 per cent and 5.2 per cent over five and 10 years to the end of 2017 respectively, it is important to keep things in perspective.
“If you do not need to withdraw your funds soon, then there is time to ride out the period of poor performance, allowing your account balance time to recover.”
Dr Oliver agreed, saying: “The declines on Wall St and the Australian stock market have created a lot of interest, but superannuation fund members should not be concerned.
“In any one year, it is quite normal for there to be a number of dips, perhaps two or three, of this magnitude.”
In 2012, the value of the share market’s benchmark, the ASX 200 index, fell 10 per cent; in 2013, it declined 11 per cent; in 2014, it retreated 9 per cent and between April 2015 and February 2016, it fell sharply by 20 per cent.
Despite these “corrections”, average returns posted by superannuation over the past six years were around 10 per cent, Dr Oliver said.
“Last year, the pull-back was 6 per cent. Pull-backs are part and parcel of share markets and are generally only a concern if you are heavily invested in growth stocks and have imminent plans to retire at the time of the declines.”
He added that while stock markets may have been down by around five per cent earlier this week, the trend is not comparable to an event like the Global Financial Crisis (GFC). At that time, nearly 10 years ago, the value of shares haemorrhaged between 50 and 55 per cent.
“We haven’t seen the same economic factors lining up that led to the GFC,” Dr Oliver said. “We haven’t had a bear market, very high interest rates or high inflation that would signal a recession. The normal signs of a recession just aren’t there.”
However, the economist admitted that anyone who may have drawn down their super fund this week would have received a smaller balance than they could have expected last week.
His advice to super members wanting to retire soon is to sit tight until the market recovers.
He added that just because shares had fallen 5 per cent, that would not be the size of the decrease in a balanced fund.
“It might be closer to 2 per cent because those funds spread their risk across a number of assets, such as property and cash.”
The past few days of volatility on global stock exchanges is a timely reminder to seek regular financial advice about how your nest egg is structured.
The closer you are to retirement, the more heavily weighted your superannuation should be to lower risk investments.
If you drew down on your super this week and had invested in a high-growth fund, then you will know the pain of not getting as big a pay cheque as you were expecting a week ago.
SuperRatings chief executive Kirby Rappell told YourLifeChoices yesterday that Australians nearing retirement ought to seek advice to ensure their investment strategies matched the desired risk profile for their age.
“No one likes volatility, especially if they are purely invested in shares,” Mr Rappell said.
“Generally, Australians have more traditional and balanced portfolios in their superannuation fund. This ensures that just 25 per cent of their super is in local shares and another 25 per cent in global equities.
“With just half of their investment exposed to market volatility, they can generally count on stability for the rest of the portfolio.”
If you are not sure how your super money is invested, then check it out. I made the mistake of taking my eye off the ball with one of my two super funds and I now regret it to the tune of around $4000.
That is how much I calculated I lost by not reading the material the super fund manager would periodically mail to me. Late last year, I decided to roll my two funds into one. That is when I realised that for the past four years, my money had been invested in a cash fund.
I was horrified knowing that cash in investment terms is a plodder. The explanation from the fund manager made me angrier. Several years ago, the super fund had been sold to the latest manager and at that time, unless you actively nominated how you wanted your money invested going forward, the default position was to put the funds in a cash account.
There are many reasons to be vigilant about how your super or any other investment is being managed. Every week, the investments watchdog reveals some of them in the form of fines or deregistration of financial planners found to have duped their clients.
And the Big Four banks are no exception. Late last month, the Australian Securities and Investments Commission (ASIC) outed the major banks over a failure to give customers advice that was in their best interest.
ASIC found that nearly 70 per cent of the investments handled on behalf of customers was parked in internal financial products – the bottom line being that planners associated with the banks were recommending funds that would return the most profit to the mother company.
The moral of the story is that you cannot set and forget your investment or super strategy. Periodically check that your money is parked in a product that matches your particular circumstances. Personally, I would even get a second or third opinion, just so I could compare advice.
And finally, before you sign on with a financial expert, check ASIC’s data bank of banned and disqualified people.
All content on the YourLifeChoices' website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care, but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness with regard to your circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances. Financial comments provided by readers cannot be relied on as professional advice, but as general comments only.
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