The Australian stock market dropped from nearly 6000 points in April 2015 to around the 5000 point level now. That is a fall of 16% in less than one year. What does that mean for you and your superannuation?
What is causing the turmoil?
The fluctuation in the market has been triggered by a range of factors.
- US Federal Reserve’s first interest rate hike
- China – slowing economic growth as the economy transitions from an investment driven to consumer driven economy
- Commodity prices falling – causing muted growth including a slump in the mining sector.
- Currency wars – countries deflating their currencies to make their goods and services cheaper
- Monetary easing in Europe, Japan and China in response to concerns over deflation
- Muted Australian growth due to the slump in the mining sector
- The Reserve Bank lowering of interest rates to 2%, in an attempt to boost our slow economy
What’s the impact on your superannuation?
Sometimes when we see falls in the market or headlines saying “$40 billion wiped from market” we immediately fear for our superannuation.
Whilst there is a correlation (i.e. there is some link between the Australian Share market and your superannuation) because 4 of the 5 investment options within Christian Super are exposed to the Australian share market (Ethical Stable, Ethical Balance, Ethical Growth and Ethical High Growth), we also need to appreciate that there is diversification in each of these four investment options.
When it comes to investing, diversification is the closest thing to a free lunch!
Diversification seeks to achieve a lower level of risk without reducing the return.
Your superannuation is diversified by investing in a mixture of:
- shares and bonds (i.e. ownership and loans)
- Australian and overseas companies and properties
- Developed and developing economies
- Small and large companies
- A range of sectors and industries
- Impact investments – often these types of investments do not correlate to share market movements, providing a strong buffer from market volatility
What should you do?
Whilst there is some impact on your portfolio when the Australian Share market goes up and down, it is important to appreciate that your portfolio is diversified to reduce risk and enhance your return by investing in different asset classes, sectors and countries.
Generally when there is a drop in market valuations we feel like moving our funds into the cash option to ensure we don’t lose money but that can often be disadvantageous. It is better to sell at market high points and buy at market low points but emotionally this is difficult to do.
If you are employed and making regular contributions into your superannuation (via your employer for example) as the market falls and contributions go into your super fund you are getting more units (own more of a particular company) than when markets were at a higher point. It’s like buying at a discount or at a sale.
If you are drawing down on your superannuation (in lump sums or a regular pension) it is good to hold a portion of your superannuation in a cash reserve and draw your pension payments and lump sum withdrawals from the cash option. This means you can draw from the cash and let the rest of your investments go up and down in value without needing to sell them. At high points in the market you can sell some investments and replenish your cash account. Click here for a brief video explaining this in more detail.
Solid research demonstrates that if you try to get in and out of the market (try to time the market) you will in most cases be in a worse position than if you left your investments in place and rode out the volatility.
In a nut shell
The value of your superannuation is impacted by the movements in the Australian share market but it is not a direct correlation due to the diversification within the fund.
If you have a successful current budget and can focus on investing for the longer term, it is often wise to remain in your current investments rather than chopping and changing them in response to short-term market movements.
The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.