‘Don’t panic’: cash isn’t king when it comes to super
Ups and downs are a part of life, especially when it comes to your retirement pool.
The past month has seen increased volatility in the financial markets where most of Australians’ superannuation funds are invested.
Some have seen their funds drop by thousands of dollars since the US attacked Iran on February 28, creating a sense of panic.
The country’s largest super fund has since noticed a sharp increase in its members cashing out their investment options, at around four times the normal rate, as members try to cut their losses.
“This is a smaller amount than we saw during the ‘Emancipation Day’ period, almost a year on, but a larger amount than usual,” AustralianSuper head of asset allocation Alistair Barker told AAP.
Last year, on April 2, US President Donald Trump declared the so-called Independence Day by announcing shock tariffs on goods imported to America.
Markets lost nearly 20 per cent in a very short period of time, causing around 11,000 AustralianSuper members (equivalent to 12 times normal) to cash out their accounts.
AustralianSuper, which manages more than $400 billion in retirement savings across almost four million accounts, found that those making the switch tended to be men and those aged 40 and over; both have higher balances
“This can occur at any age, but we have seen a marked increase in change in people aged 40 and over, and we are also seeing a higher proportion of men than women,” Mr Barker said.
At the same time, members with high growth accounts and greater exposure to equities may be more vulnerable to a transition than those with balanced options that hold equities, infrastructure, fixed interest and cash.
“The pattern of behavior in times of stress tends to be that people move away from one of these options, which is more exposure to stocks, to something like cash,” Mr. Barker said.
But super experts, including industry body Super Members Council, warn that individuals have a poor track record of picking the market and switching during volatility caps losses with long-term effects.
Consider this example provided by Australian Super, with simplified estimates assuming no further superannuation contributions:
One member had a balance of $100,000 on Independence Day last year and switched from a balanced option to cash shortly thereafter.
Three months later, they were $8,000 worse off.
A year later, those losses total $11,000, and because they missed the recovery, the pool is still under $100,000.
The potential difference over about 30 years is between $26,000 and $57,000, depending on if and when they return.
“What this really highlights is that while people get quite anxious when markets are volatile, some of the biggest upward moves in markets often happen on days right around difficult periods,” Mr. Barker said.
“We saw one of these (during the week) with the announcement of the possibility of a ceasefire between the United States and Iran.
“Markets rebounded quite significantly (the next day).
“They may think they’re missing the bad days, but they’re also missing the good days, and those good days are pretty important right after this time last year and the events we’re going through now.”
So, theoretically, is there time to panic in the markets?
Generally speaking, no, because the industry says it operates with products designed to weather periods of market volatility.
“In fact, the biggest risk many Australians face is probably keeping up with the cost of living,” Mr Barker warned.
*This is not investment advice. Always contact your superannuation fund or investment advisor to discuss your individual circumstances.
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