Spending some money on financial advice now could be the best thing you ever did next time the markets tank.
Research from SuperRatings found that panicking and shifting to cash when the COVID crisis hit last April could have resulted in a loss of potential value of almost 27 per cent in a balanced super fund.
“We looked at the impact of switching out of a balanced or growth option and into cash at the start of the pandemic and found that those with a balance of $100,000 in January 2020 and who switched to cash at the end of March would now be around $22-27,000 worse off than if they had not switched,” said SuperRatings executive director Kirby Rappell.
The maths on the situation goes like this: If you had a $100,000 fund just prior to the COVID collapse it would have lost $12,000 in value after the market fell, leaving you at a value of $88,000.
If you moved into cash at that point, your savings would have risen to $88,440 with cash rates lingering at between 0.2 and 0.5 per cent. And even if you had used term deposits, you would have only earned 1.28 per cent, based on data from Canstar.
But if you had stayed where you were with your super in the standard balanced/growth option of between 61 and 80 per cent in growth assets, your fund would have been worth $111,760 today.
With a return like that, the market crash would have meant nothing, as you would have made more in super than in most years.
Get your risk profile right
Those that moved into cash at the nadir of the slump basically panicked.
If you did that, or you want to prevent yourself doing that in the future, it might be a good idea to get some financial advice, said James McFall, principal at Yield Financial Planning.
Such an adviser, who could come through your super fund or a private group, “will help you get your risk profile right,” Mr McFall said.
That in turn will see you invest in funds with volatility levels that you can reasonably tolerate.
That’s not just a temperament thing. “It’s about understanding what your basic liquidity needs are”, Mr McFall said.
That is, how much cash you need to maintain access to for safety’s sake if something goes awry, such as in the event of a job loss, an injury, or an unexpected expense.
Once this is worked out, then you can fashion your portfolio based on it.
The amount of cash you will need in a super fund depends on how close you are to retirement.
The closer to retirement you are the more access to liquidity you are likely to need. If you have enough liquidity, you can avoid selling out of market investments when the market turns down.
“Once you’ve got that strategy in place, you can feel confident that you don’t need to sell in those down times,” Mr McFall said.
Investment selection will obviously affect your investment performance.
Although the figures above show how a growth-orientated super fund will outperform a cash-based option, that reality is even starker over 15 years.
A typical balanced super option with a balance of $100,000 in July 2006 would have accumulated to $247,557 in July this year, more than doubling in size. For those who were more aggressive and chose the growth option, their balance would have grown to $254,006, SuperRatings found.
Share-focused options in super delivered the top returns. An Australian share fund would have grown to $276,099 and the median international shares option would have reached $271,051 – though these types of options involve greater risks.
Starkly, if all your savings were in the cash option over that period your fund would have only grown to $151,158 by July 31.
Of course, share-only funds are highly volatile and may be down when you need cash. However, there are ways to get a bit more zing in a standard super fund without overly exposing yourself to shares.
Play the market
“You can use what we call a ‘core and satellite’ strategy,” said David Simon, principal with Integral Private Wealth.
“You keep the bulk of your money in the core strategy, which might be a default or balanced option in your super fund.”
“Then you might take 10 per cent or 20 per cent and sit it outside that in what we call a satellite. That could be in direct shares and ETFs [exchange-traded fund] or some of the more flamboyant, riskier investments,” Mr Simon said.
The satellite investments could be bought and sold with changes in market conditions or held indefinitely as a way of getting high-growth exposure.
“As you grow in experience, you could weigh in with more or less in the satellites depending on what you feel comfortable with,” Mr Simon said.
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