...isn't it so predictable to expect such an article from mainstream just AFTER we have a bear market.
...that constant reminder to stay the course, BUT only after the event. No caution, nothing said when markets have gone to stratospheric heights not to reduce or wind back.
...Even then, the jury is still out if we get better from here or we go further downhill from here. And that is an individual judgment and choice , we can either assume faith and take mainstream mantra at face value or assess on our own based on the data in front of us.
..Those charts comparing returns ...it uses the major indices, which we use gets re-calibrated every quarter or so, and it assumes that one stays in Cash forever, lol...and of course not everyone can time the market well, well, they can't if they don't try and if they must only try after the event. Because? They follow mainstream lead. As I said before, most things published by mainstream is after the event, instos get to act first on any earlier perceived adverse news, retailers get told and made to realise once we are already in the thick of the downturn. And then get told not to panic.
The ‘double whammy’ that’s derailed your super
Superannuation funds have reported rare losses amid inflation-fuelled market turmoil. But investors are being urged to resist fleeing to cash.
Duncan HughesReporter
Jul 1, 2022 – 5.00am
Superannuation members will in coming weeks be confronted by letters from their fund that plainly tell of the dilemma facing investors around the world.
Traditional safe-haven strategies used to protect the value of portfolios during volatile markets are performing as badly as higher-risk equities as interest rates rise to curb inflation as the economy slows.
“This is a train wreck,” says Alex Dunnin, executive director of research house Rainmaker Group. “When a traditionally conservative strategy is getting the worst returns then all bets are off. It doesn’t matter where you go, almost everyone will be in pain.”
Will super funds rebound from a median loss in 2021-22? Simon Letch
Analysis being finalised by superannuation research house Chant West shows that popular growth strategies, with up to 80 per cent of assets in equities, and conservative funds, with up to 60 per cent in cash and fixed interest, are both posting losses of between 2.5 per cent and 3.5 per cent for the past 12 months.
Shane Oliver, chief economist at AMP Capital, says: “Normally bonds or fixed income are safer, less volatile asset classes than shares, which means conservative funds have a higher exposure to them than shares. But every so often bonds have a rough ride at the same time as shares – usually when inflation is a major problem and central banks are raising interest rates – pushing up bond yields and resulting in negative returns from both fixed income (as bonds suffer a capital loss when bond yields rise) and shares.”
The result is that both conservative and balanced growth funds tend to have poor returns, Oliver says.
Performance results for the end of the financial year are currently being prepared for 23 million super accounts, with an estimated $2.2 trillion investments, of which around 56 per cent is invested in listed and unlisted equities and 27 per cent in cash and fixed income, according to the Association of Super Funds of Australia, a sector lobby group.
The bulk of the remainder is in property and infrastructure with around 2 per cent in other assets, including hedge funds and commodities.
Losses for the year follow a bonanza 2020-21 when superannuation balances increased by more than 15 per cent, investment portfolios were up 17 per cent and house prices rose by almost 24 per cent, according to Rainmaker’s analysis.
But attempts to control inflation by hiking interest rates are hurting equities, reducing returns on fixed income, contributing to a fall in property prices and adding to global economic uncertainty.
Nowhere to hide
The S&P/ASX200 index of Australian stocks ended the year down 10.2 per cent, despite a recent pickup in performance. The Australian government bond index has dropped 11 per cent, and house prices are tipped to dip by between 15 per cent and 20 per cent.
Some banks have been increasing savings accounts rates from rock-bottom levels, typically around 63 basis points. The US S&P500 is down by around 18 per cent.
The Reserve Bank of Australia (RBA), which has raised cash rates by 75 basis points since the May meeting, is expected to announce another increase on Tuesday in its bid to lower inflation, which is currently around 5 per cent.
The dilemma facing super funds attempting to balance the impact of rising inflation and falling asset values is highlighted by the Rainmaker data on the performance of low-cost MySuper funds – which have plunged from a record-breaking 19 per cent in 2020-2021 to a median return of -2.8 per cent.
This year’s result is the fourth-lowest full-year result in 35 years and the sixth time that default super has posted a negative result.
Despite increased asset diversification, the rolling 20-year correlation between the Australian Securities Exchange and MySuper, which is a default account for those who don’t choose their own super when they start a new fund, is around 0.95 per cent, which means equities remain the chief asset for returns.
“What makes this year’s returns different is not just the equities market correction, but that inflation is back,” Dunnin says, adding it is likely to rise from around 5 per cent at March to almost 8 per cent by the calendar year.
“Inflation this high, on top of already negative nominal MySuper Index returns, means real returns – which are nominal returns minus inflation – are a stunningly low -7.9 per cent, the third-lowest on record,” he says.
AMP’s Oliver says the last time there were poor returns from conservative and balanced funds was during the bond crash of 1994, when inflation fears caused central banks, including the RBA, to aggressively raise rates following the early-1990s recession.
Oliver says: “This time round, inflation has been much higher, and it has been even more severe for bond rates that have increased from even lower levels. In fact, Australian bonds look to have had their worst 12 months since the 1930s.”
‘Every crisis is different’
He says apart from allocating more to cash, there are “few alternatives” for investors looking for safe havens.
“Commodities have performed better, but they are volatile and cryptocurrencies have provided no hedge against rising inflation.”
For example, since November the value of bitcoin has slumped more than two-thirds to around $29,000.
“Investors with long-term horizons, such as super savers, should not be disturbed by market noise and remain patient,” Paul Moran, principal of Moran Partners Financial Planning, says.
“It is very hard for investors to pinpoint a market high or low until it has happened,” Moran says. “Every crisis is different. Looking to move from equities into cash only locks in the losses and means most likely missing out on the subsequent rebound.”
Mano Mohankumar, senior investment research manager at Chant West, added: “Even many members close to retirement can take a long-term view. That’s because a lot of people most likely won’t take out all their super when they retire.”
A substantial amount is likely to stay in the super system in the pension phase, usually for many years, which provides plenty of time for losses to be recovered, Mohankumar says.
Ashley Owen, chief investment officer for Stanford Brown Private Wealth, says retirees will need to rethink the “textbook” recommendation that bonds offer a less volatile alternative to equities for retirement income planning.
According to Vanguard, a $10,000 investment in Australian shares around the time of the stock market crash in October 1987 would have been worth around $214,000 by April 2020, an annual return of around 9 per cent.
By contrast, keeping the money in cash over the same period would have produced $74,000, or a return of 6 per cent.
The best performing asset class has been US shares, which would have returned $347,000, or more than 10 per cent a year.
David Clark, a partner at financial advisory group Cameron Harrison, also says investors need to take a long-term perspective.
“The recent fall in the equity market has returned the index to its long-term trend, which is a very credible 56 per cent higher than five years ago,” Clark says.
“We also have very little traditional fixed bonds, with more than 80 per cent of our defensive allocation in floating-rate bonds. These have delivered positive returns, as the yields increase with interest rate rises.”
Commodities and cash
Chris Brycki, chief executive of online investment adviser Stockspot, says investors could consider gold, commodities and cash.
Cash returns have risen recently on the back of interest rate hikes. This could continue if the RBA pursues its monetary tightening policy.
“Gold is something we recommend all investors have exposure to. It has historically been the purest form of money and acts like a government bond that doesn’t pay interest and protects against inflation. Throughout the centuries, it has been able to maintain its purchasing power and provide portfolio insurance in times of need,” Brycki says.
Commodities are also good performers and have benefited from renewed interest in oil, wheat and metals, he says.
Australian shares, which have broad exposure to commodities, have benefited from the surge in commodity prices, which has helped to offset some of the losses in other sectors, he says.
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