Finance Your Super Superannuation: is it time to lock in your gains?
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Superannuation: is it time to lock in your gains?

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Booming local and international stockmarkets are presenting superannuation members with a pleasant dilemma at the moment.

In the eight months since July 1 last year, the average returns for many equities-based investment options offered within super funds already exceed 10 per cent.

The recent strength of the Australian sharemarket is such that some balanced funds have also posted double-digit earning rates so far this financial year.

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AustralianSuper’s balanced fund, for example, is showing a 10.59 per cent return to members for the period between July 1 and February 19.

Historically, this represents an outstanding performance because the average annual return on AustralianSuper’s balance fund in the past decade was 7.64 per cent.

This is good news for most superannuation members whose nest eggs are generally growing at above average rates.

Sharemarkets could be overheating

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The sharemarket could be getting too hot for comfort. Photo: Shutterstock

Since touching a 12-month low on October 13 last year, the S&P/ASX 200 has rallied more than 15 per cent.

Many leading fund managers, including Perpetual Investment Management, which hold investment mandates from big superannuation funds such as Cbus and AustralianSuper, have observed that earnings valuations on local non-mining stocks are now at their highest since the dot.com bubble of 2002.

While it’s possible that the sharemarket will continue to rally, there is also a real prospect that it may be due for a correction.

Fund managers are divided on whether the current rally will continue, but most acknowledge that the risks of a correction increase as the market rises.

Steven Robinson, a senior investment manager at Alleron Investment Management, believes investors are bidding up the share prices of companies like Commonwealth Bank and Telstra on the size of their dividends, rather than their growth fundamentals.

“Investors are not necessarily pricing in the risk on some of those high-yielding stocks,” he told The New Daily.

One of the world’s most respected fund managers, BlackRock Investment Management, offered the following cautionary outlook on global shares last week.

“After six years of steady gains, stocks are no longer cheap,” the fund manager stated in its February equities report.

“Investors can be forgiven for being nervous.

“Valuations are somewhere between full and stretched, global growth is lethargic and there is the nagging doubt that the entire edifice of the bull market has been founded on cheap money manufactured by the world’s central banks.”

Is it time to review your investment choices?

Cautious investors might prefer safer asset classes like bonds and cash. Shutterstock
Cautious investors might prefer safer asset classes like bonds and cash. Photo: Shutterstock

For superannuation members who are actively engaged with their retirement money, the recent big gains from share investments might give them cause to rejig their investment choices.

This might be particularly relevant for members with a conservative investment bias and who might be focused on defending their super balances against future underperformance or a material stockmarket correction.

Such members can lock in the recent gains from equity-based funds by re-allocating more of their super money to low-risk investment options such as a fixed-income product or cash.

Growth-focused members might reallocate funds from options such as “international shares” or “Australian shares” to a balanced fund option. While most balanced funds are weighted to shares, they also invest in bonds and cash and are therefore better positioned to weather stockmarket corrections than funds that only invest in equities.

Most super funds allow members to switch investments, but members should probably consult an independent investment adviser to determine whether such changes complement their medium and long-term investment strategies.

Switching options: the pros and the cons

The Pros:

1. By reducing your exposure to shares you can lock in some or all of the double-digit gains of the past few months.
2. Moving your money into fixed income or cash will reduce the risk profile of your super. This positions your super portfolio to weather a stockmarket correction more effectively.
3. You have flexibility to reinvest in an investment option weighted to shares at a later time.

The Cons:

1. Potentially, you could miss out on additional sharemarket gains if the ASX continues to rally.
2. Some funds charge a fee for switching.
3. Moving your super money to lower risk assets means you are more likely to generate lower returns in the short term. Annual returns on deposits are averaging less than 2.5 per cent.

*This article should be read for information purposes only. Readers should consult a financial planner for professional advice that is appropriate for their particular circumstances.

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