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Superannuation indexed balance in a volatile market

It is understandable when markets are volatile to think that you should move to a safer asset class like cash, but making such a change to your indexed balance without thinking through the likely impacts of such a decision, can have significant consequences for your future retirement savings.

Background – indexed balance

An index is a collection of investment assets grouped to represent all or part of a broad investment market. It provides an easy way to measure and benchmark the performance of a set of investment assets.

There are indexes for almost every asset class – Australian shares, international shares, property, bonds, currencies and commodities.

It is also possible to invest in indexes covering a subgroup of assets within each asset class. In the case of shares, this might be an industry (such as resources and financials), a sector (such as global technology or healthcare companies) or a geographical region (such as the 20 biggest Asian or European companies).

Investment indexes are designed to reflect the value and market performance of the asset class, sector or industry to which they relate. Sizeable international companies like Barclays, Standard & Poor, Morgan Stanley and Bloomberg construct them.

The financial media covers the performance of well-known local and international indexes (such as the S&P500, the ASX All Ordinaries, the Dow Jones and the NASDAQ) daily.

Indexing: How does it work?

Indexing is an investment strategy designed to provide exposure to a specific investment market’s performance by tracking its key index’s performance.

To track the index, an investment manager buys assets in the exact weighting as they occur in the index they follow. The aim is to match or duplicate the index’s return by investing in the whole index or a representative sample.

Indexing is sometimes referred to as passive investing as it involves passively buying the market rather than trying to actively beat the performance of the market by selecting investments you believe will outperform.

Volatile market and Super indexed balance

As we know, financial markets fluctuate a lot, and during times like these, we see quite a lot of movement. Let us not forget that a little over ten years ago, the world went through a global financial crisis (GFC) and that financial markets did recover in a relatively short period. That recovery eventually restored people’s superannuation savings.

Whilst COVID-19 is different from the GFC, one thing that history has taught us is that markets do bounce back. It is important to remember that superannuation is a long-term investment. It is structured to carry people’s savings through the invariable peaks and troughs of market shocks, just like those we are seeing now.

A balanced fund usually targets a 40% – 50% allocation to defensive-styled assets (cash and fixed interest) and a 50% – 60% allocation to growth-styled assets (equities and listed property). The benefit is that your portfolio should be well-diversified across the various asset classes, and having a cash buffer in market uncertainty makes good sense. Remember that you will have an allocation to this asset as part of your overall balanced indexed portfolio anyway.

A market downturn is not the right time to sell out of your superannuation portfolio and switch to cash. By selling down when the market is low, you will effectively crystallise any losses your fund has experienced. You may miss out on any investment market recovery, and this will result in an exponentially negative impact on your superannuation balance over the following decades.

Superannuation provides a retirement income when you need it when you are older and no longer working. Therefore, you should use this time to sit tight, ride out the period of uncertainty, and wait for the markets to recover. Remember, superannuation is a long-term investment and over time it will recover from the ups and downs in investment markets.

Suggestions during this time of uncertainty

It is critical to consider your long-term goals and make sure that any decisions you may make are well-informed.

Some tips for consideration:

  1. Avoid overfocusing on market volatility/negativity. When markets are volatile, it can be worthwhile reviewing your investment strategy, but do not make any knee-jerk reactions based on recent gains or falls. Remember that diversification across a broad range of asset classes is the best defence to ride out the ups and downs in the markets at any time.
  2. Superannuation is a long-term investment. If you are nearing retirement, say five years or less, then take the time to understand your retirement income options, and avoid any hasty decisions. Consider getting financial information or guidance from a licensed financial adviser or your superannuation fund.
  3. Refrain from trying to time the market. It is unwise to sell investments or shares based on the daily headlines. Trying to predict the best time to buy and sell is just too difficult to achieve, as you may end up selling your investments and moving to cash, only for the markets to recover soon after. Holding onto your investments and sticking to your plan is effective if your financial goals and situation have stayed the same.
  4. Review your financial goals. Unexpected events can have an impact on your financial goals. Consider what your long-term goals are and be sure you make well-informed decisions. Discuss the situation with your partner or family, as this can often provide some additional perspective for you.

The content of this article is intended to provide a general guide to the subject matter. You should seek specialist advice about your specific circumstances.

Vogue Advisory Group – how we can help with your superannuation indexed balance

Finally, if you are using or thinking about using a financial adviser, now may be a good time to do so, as they can assist you with reviewing your financial goals and strategies and refining them if necessary.

Vogue Advisory Group can help. Our multi-disciplinary financial team provides a comprehensive suite of services, supported by our alliance partners, to provide trusted advice and deliver the transformation our clients seek.

Contact us if you require our assistance, and one of our financial advisors will help you.