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Super fund members are being urged to stay the course and not get spooked by turmoil in global markets as the potential for more interest rate rises on the horizon cause shares to falter.
The returns of the typical “balanced” investment option, the type of investment option most people who are still working have, are down for the third month in a row to October 31.
Xavier O’Halloran of Super Consumers Australia says switching super to try and time the market rarely pays off. Credit: Natalie Boog
SuperRatings figures show that since the start of this calendar year to October 31 the typical balanced option has returned 3.8 per cent, with sizeable swings positive and negative, month to month.
However, the volatility will pass and those who switch to a more conservative investment option could lose out, experts warn.
Fund members only have to look at recent history to see the folly of switching during times of market volatility. During the COVID-19 induced market downturn of the early part of 2020, Australian share prices fell 30 per cent in three weeks.
Thousands of fund members switched from a balanced option to their funds’ cash option or to one of their funds’ more conservatively managed diversified options.
The COVID-19 sharemarket downturn was relatively short-lived, leaving those who switched with real losses from what otherwise would have been paper losses.
Those who ignored the noise and sat on their hands were able to ride out the downturn.
Balanced options deliver good returns over the longer term. For the 10 years to October 31 this year, the typical balanced option produced an average annual compound return of 6.5 per cent.
Capital stable options, which have more of the money allocated to defensive assets, such as fixed interest and cash, and less in shares, returned 4.1 per cent over the same period. Cash options, the most conservative investment options of all, returned about 1.6 per cent.
The numbers are reminders of the hazards of trying to time the market, says Xavier O’Halloran, director of consumer group Super Consumers Australia.
“Super is a long-term investment and retirees with significant super savings will be invested for years, and likely able to ride out the peaks and troughs of markets,” he says. Returns should be checked periodically against investment options that invest the same way, he says.
“It’s important to focus on the fundamentals, such as fees and long-term performance”, O’Halloran says.
Kirby Rappell, the executive director of SuperRatings, says fund members should “block out the shorter term noise”.
“The ups and downs are likely to continue, and members who are thinking about changing their strategy are encouraged to contact their fund, or speak with a trusted adviser, before making any changes,” he says.
Most market watchers are expecting inflation to stay higher than central banks want for some time, and that higher rates, or expectations of higher rates will likely continue to weigh on the returns of shares.
Shares constitute more than 50 per cent of the typical balanced option’s asset allocation, with Australian shares the largest component of that.
The Australian Securities Exchange, as measured by the S&P/ASX 200 index, is trading at about 7000 points, where it was at the start of this year.
Last week’s increase in the cash rate by the Reserve Bank of Australia and speculation the bank may not have yet reached the “terminal” cash rate, could see the returns of Australian shares subdued for some time.
Markets believe the US Federal Reserve is at, or close to the peak of its rate raising cycle, though Sonal Desai, fixed income chief investment officer at fund manager Franklin Templeton, is not ruling out the need for another rate hike.
“Inflation is not quite under control yet, and too volatile for comfort, especially with the risk of another energy shock always just around the corner,” she says.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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