A significant increase in market volatility since October 2018 has created a challenging environment for investors and the wider superannuation industry.
As a result, you may have noticed your account balance fluctuating more than usual in recent months.
How has my super been affected?
The Australian share market (ASX 200 index) fell almost 7% over the six months to December 2018, which contributed to returns of -2.3% and -1.1% for our Growth and Balanced Growth options^1 in which the majority of our members are invested.
If your super is invested one of our pre-mixed options, the impact of the volatility will depend on the option’s exposure to shares. Investment options with a higher allocation to shares will be affected most^2.
While market downturns and short-term volatility can affect your account balance, they are a normal part of investing. It’s also important to consider volatility in a longer-term context. Share markets have risen strongly in recent years, helping deliver good returns to investors. For example, the Australian share market returned 9.6% pa for the seven years to 31 December 2018, while the global share market return was 12.3% pa for the same period. Share markets often have a period of ‘correction’ after such strong growth.
I’m concerned, what should I do?
When you see others reacting to a falling share market, it can be hard to accept that doing nothing is often the most sensible response. But during times of heightened volatility, it’s even more important to focus on your long-term strategy and think carefully before making any significant changes. Switching to a more conservative option after a market fall locks in losses and may mean you miss out on any rebound that occurs.
Markets are unpredictable and trying to time them means you must get two important decisions right: when to get out and when to get back in. This means there is a risk of having to pay a higher price to get back into the market, as well as missing out on the growth from any market recovery.
The important thing is to choose an option that is appropriate for your age, investment timeframe, risk tolerance, any investments you have outside of super, and your retirement goals.
What if I'm retired or close to retirement?
Even in retirement, you will probably have a reasonably long investment horizon and run the risk of outliving your retirement savings. One way to manage this risk is to consider holding at least some riskier assets like shares. These assets can help reduce longevity risk because their value tends to grow over time, although there could be periods when your balance fluctuates due to market volatility.
It also helps if you have reviewed your financial situation, set some medium and longer-term goals and implemented a plan to achieve those goals. Sticking with your longer-term strategy and focusing on your progress towards your longer-term goals will make it much easier to deal with periods of market volatility.
How long will the volatility continue?
While share markets rebounded strongly in January, recovering some of last year’s losses, we expect volatility will remain high during 2019 as markets adjust to less accommodative monetary policies (higher interest rates), and trade tensions between the US and China continue to unsettle investors. Domestically, the Federal election brings additional uncertainty and the extent to which the cooling housing market will affect consumer spending continues to be a watchpoint.
How does First State Super manage investment volatility?
For most of our members, super is a long-term investment and we manage our investment portfolios with longer-term objectives in mind. This means we look beyond the daily news and focus on investing in a mix of good quality assets that can grow your savings over time.
There are a few ways we manage exposure to markets that can help during periods of greater volatility. For example, we diversify our pre-mixed options across many asset classes including property, infrastructure, bonds and shares. Spreading your money across a range of investments reduces the impact of a poor performance in any one asset class.
We also apply active asset allocation which allows us to temporarily increase or decrease our exposure to particular asset classes. This helps protect members from overexposure to expensive markets and can boost returns by increasing exposures to certain sectors when they are attractively priced. For example, during the December quarter, we were underweight in share markets and this had a positive impact on performance over the period.
Finally, our approach to foreign currency management offers an additional measure of protection. During periods of market uncertainty, the Australian dollar tends to fall in value as investors seek ‘safe havens’ such as the US dollar, Japanese yen and gold. A portion of our fund’s foreign assets are ‘unhedged’ which means they are exposed to foreign currency movements. When the Australian dollar falls, this can help protect returns by increasing the value of our overseas assets in Australian dollar terms.
What if I still have questions?
Talk to one of our financial planners who will assess your situation to determine if your strategy needs adjusting. This can be reassuring, especially if you are nearing retirement. Visit firststatesuper.com.au/advice for further information on our advice options and how to arrange an appointment.