Thinking of touching your super? Do the stress test

AustralianSuper has recorded its first reversal since the GFC – it won’t be the last fund to do so. Here’s what you must consider.

Place this rotten period in perspective and stress test your previous decisions.

Millions of Australians using industry fund AustralianSuper have just received a sharp dose of ­reality after the fund went backwards over the past year – the first time it reported a negative return since the global financial crisis.

What’s more, if Australian­Super – one of the standout performers in the local sector – can’t make money in these markets, it is safe to say there will be many more funds reporting losses in the weeks ahead.

What to do? If you are in any big super fund, don’t ignore what’s going on. Place this rotten period in perspective and stress test your previous decisions.

Big funds are bracing for a rush of investors who may try to stem losses to secure their savings.

Most commonly, investors will try to avoid further losses by moving to cash. Other investors may switch funds or switch their preferences inside funds.

Like many other super investors, AustralianSuper members are used to getting near double-digit returns: over the past decade the average return of its “balanced option” has been 9.3 per cent.

To be fair the managers at most major super funds have continually warned investors not to expect such returns to persist – the 20.4 per cent notched up AustralianSuper last year was clearly unsustainable.

In contrast, this year’s return from AustralianSuper balanced fund is -2.7 per cent.

AustralianSuper chief executive Paul Schroder and chief investment officer Mark Delaney have tried to console members with a key message that reads “challenging market conditions highlight the need for long-term focus”. Importantly, the fund then adds: “In our experience short-term market volatility may see members worse off in the long run and members in or close to retirement should remember they may be invested for a long time.”

There is an element of self-­defence here from a team that has just reported a negative return, but it is also fair comment: keep in mind the long-term returns from super are closer to 6 per cent.

Remember the swing factor in your super returns is invariably sharemarket returns: consider Wall Street’s 21 per cent drop in the first half of the year – since 1960 the S&P 500 has had just two first-half losses greater.

That’s not to say the sell-off is over, but the statistical chances of the second half of this year being as bad as the first are slim.

Here’s the five key questions you need to consider to stress test your super settings.

1. Can you beat the market?

If you have your money with an institutional fund manager rather than a self-managed super fund then you have decided to let professionals do the investing for you – and to pay their fees. Unless you know that you can beat a major super fund’s investment team – and more than a million SMSF members in our local market have taken this decision – then don’t move your money away from the professionals.

2. If you exit the market now, will you know when to return?

Transferring your super assets to cash will stem your losses. But cash deposit rates remain hopeless. Very few retirees could live comfortably on returns of 1-2 per cent per annum. In other words, you must return to investing “properly” in the future … when will that be? If you miss the inevitable market rebound, you may never regain the losses.

3. Has your investing personality changed since the markets went sour?

You are a risk taker or not. A return of -2 per cent should not change your personal investments preferences. One of the most important factors in long-term investing is consistency: you can be consistently bullish or bearish, but to swing between the two settings is a recipe for losses.
4. Will you remain an investor after you retire?

One of the major issues in super is “sequence risk” – put simply, that means if you were unlucky enough that the last years before you retire happen to be very bad years then your nest egg at retirement will be sharply reduced. But it is very likely you will continue to be an investor after you retire – it is another reason not to overreact to bad news.

5. How would you feel if you triggered losses rather than your super manager?

It is one thing to have your super fund lose money, it is another to lose money as a direct result of your own actions. We rarely get to see a clear example of this, but the crash of 2020 offers a very recent example. Industry figures suggest that even someone with a modest super balance of $50,000 would have lost up to $20,000 if they pulled their money out at the bottom of the sell-off in mid-2020. Worse still, the loss at retirement in such a case is estimated at more than $60,000.

As they say in the investment textbooks: “Act, but don’t react.”

Originally published as Thinking of touching your super? Do the stress test