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Your super and market volatility
If your super balance has decreased this year, you might be feeling a bit shaken. You’re not alone.
Investment markets worldwide have taken a significant downturn this year, and because super is invested in the markets, nearly everyone’s super has been affected.
The important thing is not to lose heart. Negative returns are something you should expect from super from time to time. There are still lots of reasons to feel good about your super.
 Remember that super is still tax-effective
Investing isn’t just about returns. Other factors are equally as important, such as tax-effectiveness.
Super can be a tax-effective investment structure. Super offers tax advantages in three ways:
- On contributions as they are paid into super
- On investment returns, and
- When a super payout is taken after the age of 60.
These tax advantages mean that you can get more ‘bang for your buck’ with super. Speak to a licensed or appropriately authorised financial adviser to ensure you’re making the most of super’s tax advantages.
Keep your eye on the long-term game
It’s vital to keep this market downturn in perspective as it’s only a small part of the larger context.
One-year investment returns can distort the true picture of how your super is performing. Consider the one-year returns against the longer term gain shown in this graph.
While Australian shares have delivered a return of -13.7% (S&P/ASX300) for the year to 30 June 2008, over the last 10 years, they have risen by 189% in total or an average of 11.2% a year, as compared to an investment in cash which has returned 7.34% (UBSA 90 Day Bank Bill Index) for the year to 30 June 2008, but an increase of 73.71% in total or an average of 5.68% a year.
Past performance should not be relied on as an indicator of future performance. Performance for Australian Shares is based on the S&P/ASX 300. Performance for cash is based on the UBSA 90 Day Bank Bill Index.
Check out the five- and ten-year returns for your investment option, and you’ll get a clearer indication of its performance (see your 30 June 2008 member statement, or contact your super fund for details).
Take comfort from history
When markets get shaky, history provides some reassurance.
Downturns have inevitably been followed by recovery. This cycle has been repeated over and over again. Over the past 15 years, there have been several significant downward adjustments, which have always been followed by a recovery. For example:
- 1997, Asian crisis – resulted in a 10% market slide in a single month but recovered value a year later
- 2000 Tech wreck – the US NASDAQ index slumped 64%
- 2001, September 11 – global slowdown, corporate scandals and September 11 triggered a 12% slide over three months
- 2008, Sub-prime – major falls, rallies and ongoing volatility.
Over the last 15 years, the value of shares increased over the long term, despite market volatility in the short term.
So, while it is important to note that we can’t rely on historical performance as a guarantee of future performance, past events show that the markets have always recovered over time, and have provided strong long-term growth.
Don’t try to time the markets
Changing investment strategies during times of downturn can prove risky.
In fact, research has shown that investors who attempt to ‘time the markets’ by frequently switching investments generally perform badly over the long term
If you are considering changing your investment strategy, make sure you educate yourself first, and speak to a licensed or appropriately authorised financial adviser before you take action. If you don’t have an adviser, you can call Mercer’s Helpline on 1800 633 403 to speak with a Mercer financial adviser.
Arm yourself with information
Understanding investment basics can help you to keep focused during testing times.
The basic rules for investing are tried and true, and don’t change. The better you understand these, the more comfortable you will be with your investment decisions.
It’s important to understand the investment profile of your super investment option. Generally, the likelihood of a negative return for aggressive investment options (high exposure to shares) may be one year in every three to five years*. Defensive investment options (high exposure to cash) are not risk free as their return performance can erode with increases in inflation. The likelihood of a negative return with a defensive option is one year in nine*.
Why not take some time to read our fact sheet on choosing investment options. The fact sheet explains why rash decisions driven by panic can be far more costly than doing nothing at all during turbulent times.
You should also read the Product Disclosure Statement for your super fund as this will provide details of the risk profile for each investment option.
Know yourself
When choosing an investment option it’s important that you understand your personal level of risk tolerance.
How do you feel about the possibility of negative returns on your super? All investments carry risk, but high-growth investments such as shares carry more risk of negative returns. They also generally offer the greatest potential for long-term growth.
If you are prepared to trade off some potential long-term growth for a lower risk of negative returns, you might be more comfortable in a less aggressive option. It’s important to remember, however, that risk tolerance is not the only factor you should consider when choosing an option.
Take a test on our website to assess your personal risk tolerance.
Test your personal risk tolerance
Plan, plan, plan
The old adage “failing to plan is planning to fail” holds very true for super.
The best way to manage your super is to formulate a solid retirement savings plan and stick with it. You should only need to depart from it if your circumstances change.
We recommend you see a licensed or appropriately authorised financial adviser to create a plan that’s tailor-made for you.
Your super account
You can check your current super situation by signing into your super account online. Mercer Super Trust members can sign-in here.
Check your current investment strategy and its long term performance. If necessary, you can make any changes to your investment online.
If you do feel you need to make any change to your super investment, be sure to get all the facts by speaking to a licensed or appropriately authorised financial adviser before you take action. If you don’t have an adviser, you can call Mercer’s Helpline on 1800 633 403 to speak with one of Mercer's financial advisers.
Your questions answered
 Q. How can my super be going backwards?
A.We understand that seeing the balance of your super decrease is disappointing and frustrating. However, super and the investment markets go hand in hand. Super isn’t like a bank account – depending on how you have chosen to invest it, it will generally have exposure to shares, property, fixed interest and cash and can produce both positive and negative returns.
This has been a disappointing year for shares and property investments and it may be some consolation to know that super funds Australia-wide have been affected. So by sitting tight, losses are only on paper. Super invested in growth assets, as super usually is, will benefit again when the markets recover.
It is important to bear in mind that over the long term, shares and property investments have given higher returns than cash, even though it’s been a bumpier ride.
Q. How can my investment option lose money?
A. The market downturn has affected super funds Australia-wide. Mercer chooses investment managers that focus on building and managing investments that maximise returns for investors over the long term.
There is a trade-off between long-term performance and the risk of a negative return in any given year. Informed by how markets have performed in the past, most types of investments are expected to deliver a negative return at some time.
The frequency of the negative returns depends on the asset class. For example, shares are expected to give a negative return one year in every three to five years; negative returns for cash are expected once every nine years*.
Look at your investment option’s performance over the past five or ten years to see how it has been performing.
Q. When will this downturn end?
A. Unfortunately, no one can predict when markets will recover. Over the past 100 years, share or property markets have dived periodically, but they have experienced subsequent years of positive growth.
Q. Aren’t you the experts – shouldn’t you have prevented this happening to my super?
A. We’ve been expecting a correction for some time, but we couldn’t have predicted the exact timing or the scale of it. Many factors have compounded to cause the downturn, including the collapse of the sub-prime mortgage market in the US, rising oil prices and increasing inflation.
Trying to switch investments to “time the market” has its own risks.
Mercer’s focus is on selecting investment managers who maximise returns for investors over the long term rather than trying to time the market. We choose investment managers with sound fundamentals and who use diversification to minimise risk.
Q. Should I change investment options?
A. Generally, if you have a well-thought out investment strategy already, you shouldn’t change your investment option unless something in your situation has changed: your investment timeframe, your investment objectives or your risk tolerance. For most people, super is a long-term investment so it’s best to take a long-term view. Market downturns tend to be smoothed out over the long term.
Keep in mind too, that when the underlying value of investments is low, your super contributions have more buying power, which will be to your advantage when prices rise again.
When you choose your investment options, you should consider these factors:
- Your investment timeframe: do you have long until you will access the money?
- Your savings goals
- Your personal risk tolerance: are you able to cope with the occasional negative return?
If you aren’t comfortable with negative returns you might need to review your investment options.
You should seek advice from a licensed or appropriately authorised financial adviser before making a change to your super.
Q. Is super really a good investment?
A. Yes – super can be a tax-effective structure for saving for the future. Super gives tax advantages at three points: 1) when your contributions go into your account; 2) on investment returns and 3) when you take your super payout if you over age 60.
By making best use of this tax effectiveness and channelling these savings into super, it can make a difference to the super payout in the long run.
Also, for most people, super is a long-term investment, being the duration of their working life, which is when the power of compounding interest (earning interest on interest) comes into its own. Additionally, super can be invested in growth assets such as shares, which sometimes reduce in value in the short term, but which have delivered the greatest long-term returns.
If you have a well-thought out investment strategy already, you shouldn’t change it unless something in your situation has changed. (See question above.)
Q. Why wasn’t my money switched to cash when the market went down?
A. Trying to switch investments to “time the market” has its own risks as there is no certainty when markets will turn around.
Managed funds that aim for higher investment returns are generally invested in a higher proportion of shares. It is anticipated that they will, on average, produce a negative return every three to five years* due to the cyclical nature of the market. Despite this fluctuation, growth assets like shares and property have produced the highest returns long term.
While fund managers aim to limit losses and may move some assets into cash, selling assets in a downturn is not always the best approach. In the past, the markets have always recovered after a downturn. So rather than selling and realising losses, investment managers must maintain their investment mandate.
Bear in mind that when prices are low, your super contributions have more buying power, which can be to your advantage when the market recovers.
If you aren’t comfortable with negative returns you might need to review your investment options.
Q. I’m close to retirement or have only a few years to invest, what do I do?
A. If you are close to retirement age and plan to access your super in the next year or so, don’t panic. There are still many years ahead for your savings to remain invested and some exposure to growth assets may be required.
Many individuals over age 55 may choose to maintain their savings in super to enjoy the concessional tax environment and the flexibility of certain allocated pensions.
It is recommended that you speak with a licensed or appropriately authorised financial adviser for advice on your investment strategy.
Hear from Mercer's experts
Mercer's Chief Investment Officer, Russell Clarke, recently hosted briefing sessions on the impact of market volatility on our clients' investment portfolios.
You can view the presentation and video online by clicking on the link provided below.
Attend a seminar
We also encourage you to attend our seminar on understanding market volatility, hosted by a Mercer financial adviser.
Register online here
More information
If you still have questions about your super and would like to speak with a Mercer consultant or Mercer financial adviser, please call us on 1800 633 403.
Register to have a Mercer financial adviser call you
Don’t forget that although this year has been a disappointing year for the share market, super can still be a tax-effective investment and, historically, investment markets have always recovered over time following a fall.
* Please note these statements are based on historical data and shouldn't be considered a guarantee or forecast that a negative return in one year will be followed by a positive return in the next year.
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