Ask the experts: 2018 was a rough ride on the markets. Should I worry about my super?
Corporate espionage, political power plays, and the ever-present threat of climate change made 2018 a whirlwind year for stock markets, buffeting super funds and stifling their returns.
The average balanced super fund option finished 2018 with a flat return, and several had month-on-month dips into negative territory. That left many fund members understandably concerned about the future of their nest egg – but do you really need to be worried?
The New Daily asked Industry Fund Services technical, research and advice services chief Craig Sankey to get to the bottom of the matter and let us know what can be done to help.
All for one and one for all
Before you pull all your money out of super and squirrel it away in a mattress, Mr Sankey said it was important to realise that headlines and news stories about super fund returns use a figure that will often differ from individual members’ personal returns.
This happens because members’ super contributions (both from employers and those made voluntarily) will land in their accounts at different times.
While a fund might report a negative return for a particular period, an individual member might luck out and have their contribution come in after stock markets dipped. That money is then used to buy stocks at cheaper prices.
Even if personal returns dip into the red, for most there is no reason to panic. While a negative return “means on paper [members] have potentially lost money”, those losses aren’t ‘realised’ unless the member switches funds or draws down on their savings.
It seems confusing at first, but negative returns are often due to dips in the value of investments. More often than not, those investments will regain their value over time. It’s only when an investment is sold for a lower price than it was bought that it becomes a ‘realised’ loss.
Should I do anything?
The best way to make up for lost ground is “to spend time in the market”, Mr Sankey said, a strategy that he said would “generally allow your fund to grow and will recover once markets recover”.
That’s great news for those still several years away from retirement. But it does present a challenge for retirees and those on the cusp of leaving the workforce.
For retirees who have seen their returns head south, leaving money invested in their fund is the best thing to do. But that’s a luxury that’s “not going to be an option for everybody”, Mr Sankey said.
There are still useful strategies to minimise losses for those who do need to take money out of their super during down markets. These will vary from person to person and depend on individual circumstances.
Mr Sankey recommended seeking professional advice.
“Many super funds provide this at no additional cost to the member,” he said.
Understanding risk bands
Super funds offer multiple account options for their members, each with varying levels of risk. The different options are also graded into ‘risk bands’ that indicate the likelihood of incurring a negative return.
While it might seem tempting to move into a lower-risk option when markets are down, the risk of a negative return is actually only one of many factors that make up a member’s ‘risk profile’. Investments should not be changed just because short-term market fluctuations have brought negative returns.
Members need to also weigh up other risks, such as liquidity, the possibility of their money not keeping pace with inflation, even the exchange rate (which can affect foreign investments held by super funds) when choosing the right investment options for their goals.
The New Daily is owned by Industry Super Holdings