Switch hit: moving your super when a crisis hits can prove expensive
A study into comparative returns for switchers and ‘stayers’ during the Covid crash makes for sober reading.
The highly uncertain atmosphere in global markets sparked by the crisis in Ukraine has investors once again reviewing their portfolios.
When markets get volatile, superannuation investors will often consider switching to what seems safer and more conservative options.
In February 2020 investors experienced the last sharemarket crash: prices fell at the fastest rate ever seen. From peak to trough the Australian market shed 36 per cent in just 22 trading days, and global markets fared little better.
Super fund members, not surprisingly, were unnerved. They contacted their funds in droves and – despite reassurances – many succumbed to their fears and switched out of growth options into something safer, mainly cash.
How did that work out? Two years on, let’s have a look at the consequences.
Super fund call centres were inundated and, despite their best endeavours, received record numbers of investment switch requests.
It appears that the range from fund to fund was about 2-4 per cent of members – higher than in the Global Financial Crisis. This likely translates to more than 500,000 members switching out of their funds’ default growth option (61-80 per cent invested in growth assets). The majority of those switched all the way to cash rather than to an intermediate conservative option.
As it turned out, the Covid-induced downturn was relatively short-lived and markets started recovering from the end of March.
These early signs weren’t enough for the switchers, however, and only about 25 per cent had switched back out of cash by the end of June that year.
While most of those switching back returned to a growth option, that was not universal. Funds’ experiences varied, particularly due to differing demographics. For example, funds with older members saw the majority who initially switched to cash move back to more conservative diversified strategies.
Sentiment improved in the markets from here on. By the end of December 2020, about 50 per cent of members in most funds had moved back out of cash, meaning about half remained in cash, and funds tell us that 20-25 per cent were still in cash a year later at the end of 2021.
Those members are languishing in close to zero-return cash. They missed out on the post-Covid recovery and will continue to miss out on any meaningful growth if markets keep rising.
These people have either lacked the confidence or the motivation to restore their accounts to growth, which in all probability is where they should be.
Many are in the latter stages of their careers, maybe within 10 to 15 years of retirement, but as we often point out, most will keep at least some of their money in the super system well into retirement, so a significant exposure to growth assets is still important.
The implications of these switching decisions is sobering.
The table shows that hypothetical member A, who sat tight in the median growth option throughout the two years to the end of December 2021, received a cumulative return of 17.6 per cent.
Contrast that with member B, who switched to cash at the end of February 2020 (early in the crisis) and has remained there ever since. Their cumulative return for the two years is -0.7 per cent.
Even worse is member C who hit the panic button a little later at the end of March 2020. If they were still in cash at the end of 2021, their cumulative return would have been -9.7 per cent.
So how have those members who switched to cash and subsequently switched back (most of them to their original growth option) fared? The answer is that it all depends on the timing.
However, it is clear that the majority fared worse than those who decided to sit tight. Apart from the folly of switching on impulse, this episode reminds us of the value of advice. The funds we’ve spoken to tell us that members who sought advice from their fund were less likely to switch than those who didn’t.
Had they done so, they might well have saved themselves from the self-inflicted financial damage.
They would most likely have been told that the option they were in suited their investment time frame, that it was well diversified into assets other than shares and that this would cushion the blow of the sharemarket collapse, which proved to be correct.
The fear of losing money, even if only on paper, is a powerful emotion and difficult to overcome without the calming influence that expert advice – either from within the fund or from an external adviser – can provide.
Mano Mohankumar is senior investment research manager at superannuation consultant Chant West
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