Finance Your Super Thinking of switching your super into cash? Well think some more

Thinking of switching your super into cash? Well think some more

The question is should you change your allocation now.
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Superannuation fund members experienced a rude awakening with the market collapse following the emergence of COVID-19 in February.

The ensuing panic saw shares plunge 37 per cent in February and March and the average balanced superannuation fund fall 12 per cent over that period.

That left many members panicked and wondering if they should be swapping their asset allocation into cash – but here’s the bad news.

If you did swap at the March nadir, you have missed out on the fastest uptick the sharemarket has experienced since World War II.

Market recovery

Since March 23, the ASX benchmark All Ordinaries Index has jumped 18 per cent, which has pushed up super returns.

Despite the big fund crunch in the crash, “the average growth fund is likely to record a flat return for 2019-20 despite all the turmoil,” said Chant West researcher Mano Mohankumar.

So if you sold in a panic, you crystallised a loss and now face the prospect of buying back into shares at a more expensive price.

This means catching up with the market will take a long time.

But that is all water under the bridge, and financial advisers say clients  learned a lesson from the GFC shakeout back in 2008, with far fewer members selling into the falling market this time around.

Should you move now?

What is done is done for those who sold.

But many are still wondering whether now is the time to move to cash after the market rise.

The thinking there is that the markets have had a strong run but are perhaps overly optimistic and could be mugged again by economic reality when government handouts taper off or slow.

“The biggest thing to think about now is how to avoid making a big mistake,” Verse Wealth financial planner Ashley Bishop said.

“If you moved to cash in March it could mean you miss out on tens or even hundreds of thousands of dollars in growth, and that would have a really significant impact on your retirement over 20 or 30 years.”

Any potential loss made through holding too much cash for too long is amplified by movements in the sharemarket.

Over time, the market recovers from losses.

David Simon, principal of Integral Private Wealth, sees nuance in the decision about moving super into cash.

“If you have five years or less until retirement, then you should hold some cash to tide you over in bad years to prevent you having to sell assets when markets are low,” he said.

Age matters

Just how much cash you hold depends on your situation – and also on your risk appetite.

“For a self-funder – say a $1 million balance who spends $70,000 a year – then you need to have about $350,000 in cash, or 35 per cent of your balance,” Mr Simon said.

“However, if you are partly reliant on the pension and have, say, $400,000 in super and you need to draw $15,000 a year then you should have $75,000 in cash, or nearly 20 per cent of your fund.”

“That way you can plan for no financial stress,” he said. “You’ve got to make decisions rationally and not in the middle of stressful events.”

“For those wanting to boost their cash in retirement, if you sell now you are cashing in on a market recovery. If the market rises further, it doesn’t matter because you have made a decision for a reason and you get to take advantage of this situation,” Mr Simon said.

However, if you are young, the situation is different and you can afford to hold on and wait for a recovery.

“If you are in your thirties or forties, then you have a long timeframe until retirement,” Mr Bishop said.

“You might want to save enough cash to live on for three to six months if something goes wrong, but you can afford to keep your super in the market where it will grow over time.”

Don’t be too clever

Choosing the moment is hard. Photo: Getty

“People might think they want to take advantage of the recent run-up to time the market by selling and buying back in after a fall, but timing the market is something that people don’t know how to do,” Mr Bishop said.

Selling out can be easy but getting back in after a big fall is emotionally difficult for many people.

“The best days in the market follow the worst days and most people can’t buy in to take advantage of that,” Mr Bishop said.

The most important thing to do in the current environment is to review your situation with a private financial adviser or one attached to your super fund.

That way you can review your risk profile, your asset allocation and your retirement needs with someone who understands your situation, both Mr Simon and Mr Bishop stressed.

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