Market volatility is normal

Your super accumulates over a long time, potentially stretching more than four decades across your working life. If you check in regularly, you will see your balance go up, but also fluctuate as your super fund’s investment strategy rides the ups and downs of financial markets. During the last 20 years, the world has seen the September 11 terrorist attacks of 2001, the Asian tsunami of 2004, the Global Financial Crisis, Brexit and now the COVID-19 pandemic. Crises can drastically affect the balance of your super.

History strongly suggests such volatility is normal. Financial markets tend to bounce back – as indeed they did by the end of 2020. Share prices generally go up over the long run.

Understanding how your portfolio is structured can help you decide if you are happy with the amount of risk you are taking on – and if you need to change strategy. Before making any investment decision we encourage you to speak with a financial adviser.

How your super is invested

A Super fund will usually give you a choice of investment options. The most appropriate investment option(s) will depend on your personal financial objectives, age, risk tolerance and investment timeframes. It is important that you also regularly review your investment options as your risk attitude towards investing may change as you get older.

As explained in the How super funds invest your money article in this edition of Life Matters, most younger people default to a so-called “growth” or “balanced” investment strategy, where their super fund invests significantly in assets like shares, infrastructure and property. These assets are the most exposed to market volatility. They are higher risk, but also generally produce the highest long-term investment returns. This may be important to you when your priority is growing your balance.

By contrast, if you are close to retirement, you may prefer a “conservative” strategy that involves investing more heavily in bonds, fixed-term deposits or cash – all of which attract a lower but reliable investment return. The aim here is simply to preserve your balance. That said, people are different, and a retiree may still see their priority as growth to support them in retirement.

Is changing investment strategy after experiencing losses a good idea?

Short-term volatility can understandably rattle people’s nerves; however, changing your entire investment strategy of your super is a step you should only proceed with caution and after seeking advice from a financial adviser.

If you’re relatively young, you can’t withdraw from super unless you meet a condition of release. However, you can change from a higher- to lower-risk investment option within your fund. If faced with a negative investment return, you may be tempted to bail out of shares altogether and switch to cash-based investments. While this may protect you from further market falls, it also makes your response to volatility a self-fulfilling prophecy. This is because you actually realise or “crystallise” your loss.

As long as your investment horizon is long-term, the bottom of the market may be a time for your super fund to purchase assets cheaply and realise gains when the market rebounds.

What if you’re closer to retirement?

You may choose to embrace a more conservative investment mix but diversifying away from shares may still lock in losses. It’s important to make decisions wisely after considering all your options with guidance from a financial adviser.

You can still be exposed to market volatility even once you’ve retired and taken all your super. Many people choose to invest their super in an account-based pension, complying with Australian government rules that force providing for drawdowns of a minimum percentage each year based on age.

Note that the government has reduced the minimum amount you have to draw down by 50% for the 2021-22 financial year. This is designed to help retirees whose account balances have been negatively impacted during the COVID-19 pandemic.

The bottom line

Market volatility is a normal part of investing your super and allowing it to grow. Remember that the market dips but also generally rebounds. Continuing to hold assets with a higher exposure to volatility may be the best choice for investors looking for growth based on a longer-term investment strategy. However, everyone is at a different stage of life with unique retirement plans and goals. Seeking professional advice will allow you to be properly informed to face the future with confidence.

Before making any decision, it is important you consider your personal objectives, financial situation, and needs. You may want to consider obtaining financial advice tailored to your personal circumstances before you make any decision by speaking with a financial adviser.

Any advice in this article is general in nature and is provided by Resolution Life. It does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of the advice having regard to those matters as well as the relevant product disclosure statement, available from Resolution Life at resolutionlife.com.au or by calling 133 731, before making a decision about the product. You may want to consider obtaining financial advice tailored to your personal circumstances before you make any decision by speaking with a financial adviser.

What you need to know

Any advice on this website is provided by Resolution Life Australasia Limited ABN 84 079 300 379, AFSL No. 233671 (Resolution Life), and is general advice and does not take into account your objectives, financial situation or needs. Before acting on this advice, you should consider the appropriateness of the advice having regard to your objectives, financial situation and needs, as well as the relevant product disclosure statement and/or policy document, available from Resolution Life at resolutionlife.com.au or by calling 133 731, before making a decision on whether to acquire, or continue to hold, the product.

The Target Market Determinations (TMDs) for our financial products (where applicable) can be found at Target Market Determinations (TMDs). The TMDs describe the key features and attributes of an applicable product that affect whether it is likely to be consistent with the objectives, financial situation and needs of consumers in the target market.

Resolution Life is part of the Resolution Life Group and can be contacted via contact us or by calling the phone number mentioned above.

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