Provided by Mercer: 8/4/09
In the midst of a downturn, it’s difficult to recognise that the turmoil we saw in 2008 is a part, though an extreme one, of the normal investment market cycle.
In this article, Mercer’s Chief Investment Officer Russell Clarke puts the year’s events into context and explains what’s likely to happen next.
Since October 2007, sharemarkets have been on a downward slide. How does this downturn compare to others seen in the 20th century?
For the Dow Jones (the oldest and most widely used of all stock market indicators) the percentage losses of October 2008 are exceeded by 15 other months since 1928. These months were in 1929, 1930, 1931, 1932, 1933, 1938, 1940, 1987, and 1998. Most, as you will have noticed, were during the Great Depression, so the falls in 2008 are among the top three in recent memory.
What impact has it had on superannuation balances?
Normally, diversified investment options (such as those offered in multi-sector investment options like Mercer Growth) offer some protection in volatile times.
In 2008, however, the substantial negative returns of most growth orientated sectors overwhelmed the modest positive returns of defensive sectors such as fixed interest and cash. Despite this, the investment options remain on track to achieve their medium to longer-term objectives. It’s also important not to forget the very strong performance achieved by most growth oriented investors over the four years prior to 2007/08, which will contribute to positive longer-term outcomes.
Are the right steps being taken to bring us out of the downturn?
Central banks and governments around the world responded quickly to inject liquidity into the financial system, reduce official interest rates and support particular financial institutions. These steps clearly contrast with the lack of action taken in the lead up to the Great Depression and, among other differences, mitigate against the current crisis turning into a 30s-style depression. While they didn’t immediately resonate with investors, there are positive signs that confidence will gradually creep back into financial markets.
When will we see a recovery?
As a guide, the average bear market (a market in which share prices are falling) lasts around 15 months. However, no one can accurately predict how long this crisis will last
and what its recovery path will be.
Are you making changes as a result of the volatility?
The investment options’ foundations remain solid and sound. We continue to monitor them vigilantly but are conscious of not making ‘knee-jerk’ changes to the fundamental strategies in response to the current climate. This would likely only serve to weaken rather than enhance them. Of course, we always seek opportunities to enhance the investment options through manager changes, by ‘tilting’ asset allocations towards better-valued assets and through things like currency hedging.
Should I keep adding to my super account?
Making regular payments to your super can significantly increase your payout at retirement. This is because of the compounding effect of regular contributions on your super savings. Also, when markets are down you are able to buy more units in your chosen investment option because the price is lower. It’s kind of like buying good quality items when they are on sale — so long as they are fundamentally good buys, when the market recovers you will hold more of these units and therefore benefit when their value goes up in the future.
“History tells us that markets will recover over time. Indeed, for most members, that is the point with superannuation. It has a long-term focus — there is time to recover given average working lives of 30 to 40 years and retirements spanning 20 years plus.”
14 November 2008
The Hon Nick Sherry
Minister for Superannuation and Corporate Law
Tips for tough times
When investment markets decline, many investors get nervous and some make rash
decisions. A common reaction is to sell up, head for safer waters and invest in ‘cash’.
Unfortunately, by the time most investors realise a fall is occurring it’s usually too
late. Selling or changing strategies during a decline is rarely the appropriate
strategy for long-term investors.
1. Maintain a long-term view
Superannuation is a long term investment. By holding to your investment strategy, you can ride out periods of market decline. Remember, it’s about time in, not timing.
2. Understand the risk/return trade-off
There is no such thing as a risk-free investment. Growth investments (ie.property, shares) are likely to experience volatility in performance from year to year, but have greater potential for long-term return. Defensive investments (ie. cash and fixed interest) tend to produce lower long-term, but more stable returns than growth investments.
3. Don’t try to time the market
For many investors, trying to time the market actually results in lower long-term returns. History shows that a significant portion of market returns occur in a relatively few number of days. By trying to time the market, you may miss a short but strong period of growth and may not achieve the same result as someone who had persevered. Past performance is not a reliable indicator of future performance.
Review your current investment strategy at mercersupertrust.com
Check historic investment performance and see up-to-date facts on available
investment options. It’s recommended that you speak to a licensed or appropriately
authorised financial adviser before you make any decisions about your super.
As a member of the Mercer Super Trust, free limited financial advice is available
over the phone — call the Helpline on 1800 682 525 to take advantage of this service.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
