A horror October has slashed equity market gains in the United States and Australia, but the “vagaries of the market” won’t hurt most of Australia’s superannuation savings.
Australia’s standard equities benchmark, the ASX 200, fell more than 2 per cent on Thursday after Wall Street endured its biggest sell-off in seven years, reversing all the gains made in local markets over the past 12 months.
However, the sharp losses won’t badly hurt Australia’s $2.7 trillion superannuation system, according to an industry spokesman, and Australians can rest assured their retirement savings will be relatively unaffected.
“We’ve pretty much lost the value that was added to the index this year so far,” Industry Super Australia chief economist Stephen Anthony told The New Daily.
“Should super fund members be worried about this? There may be some short-term pain, but what we know is the long-term trend is all up.”
Mr Anthony said “we might have a bad month and we might have a bad year” but over the length of a super fund’s investment term, typically around 40 years or so, returns look positive.
Dr Martin Fahy, the chief executive of superannuation research and advocacy group ASFA, said superannuation’s long-term strategy meant sudden market jolts, like those in the past month, rarely had a big impact on people’s savings.
“Superannuation is a 40-year journey for people, so it’s important that we see those balances and the funds under management in a long-term context,” he said.
“It’s about long returns, not necessarily the vagaries of the market. That’s not to say it’s not concerning when we see shocks to the market, but you need to look at how the system responds to that.”
Don’t focus on the short term
Adam Fleck, the director of equities research at investment research company Morningstar, said market volatility is difficult to predict, and the causes impossible to identify definitively.
However, Mr Fleck said these fluctuations shouldn’t spook people because price is a product of a number of factors and good- quality investments will still deliver over longer terms in spite of short-term movements.
“Just because Mr Market is shouting one price at you today that’s different from yesterday’s, it doesn’t mean the value of that company has changed,” he said.
As such, Mr Anthony said super fund members should “sit on their hands” during market turmoil and pay attention to what their fund’s investment team says, because selling out of struggling stocks could leave people worse off.
“There are only losses if you actually accrue them; you have to sell out to take the loss,” he said.
Mr Anthony said there’s “always a rebound coming” and the best thing members can do is “have faith in the super system”.
“We have a really good approach to investing and it sees through the volatility.”
Stocks only part of the equation
Super funds have a wide net of assets in their portfolios, and typically only 40 to 50 per cent of these are stocks.
Dr Fahy said the remaining 50 per cent is then divided into property, infrastructure, cash and fixed-income assets, such as bonds.
Additionally, the stocks held by super funds are also typically quite diverse, investing in numerous sectors both in Australian and global markets, and this diversification limits the effect that market falls have on the overall fund.
Mr Anthony said some investments may even benefit from Wall Street’s latest bloodbath.
“Investments can take all sorts of forms. You shouldn’t just think of them as one stock in some sort of risky asset. They’re spread far and wide.”
The curse of in-the-red October?
October is notorious as a bad month for stock markets, with many big market downturns (including the Great Depression and the 1987 market crash) beginning in the lead-up to Halloween.
However, whether or not these fears are justified is conjecture.
Mr Anthony said it’s “definitely true”, and something that “every year you get nervous about”.
“It may just be an aberration, or just historical noise, but it’s historically borne out if you think about episodes during the GFC and in 1987, I think you’ll find October has always had a role to play.”
Dr Fahy however disputed the impact of the year’s spookiest month on stock markets.
“Every month of the year seems to have some myth associated with it,” he said.