With recent volatility in sharemarkets, and many people still wary after the global financial crisis, members might be wondering if shares are investments that are too risky for their super.
| “Superannuation funds post worst returns since collapse of Lehman” |
Source: I&T News, 24 October 2011
Headlines such as the one above referring to returns for the September 2011 quarter, and headlines that tell us the Australian sharemarket has wiped off $50 billion in a day, fuel the perception that investing in shares might be too risky and make us question whether shares actually add value over time.
Why we invest in shares
At AustralianSuper we believe that investing in shares is an important part of a diversified investment portfolio and adds far more value over the longer term than market corrections and crashes take away.
Shares, specifically Australian Shares, add value for superannuation and pension investors in two ways. First, through income generated by dividends which can be boosted by franking credit rebates, and secondly, when stocks rise in value. Shares are a ‘wealth creating’ investment that, history has shown, over time significantly outperform inflation.
Our investment decisions are based on a medium to long-term outlook for economies and markets, with the overarching objective of maximising investment returns for members. As we’ve seen over the last few months, investor sentiment can change quickly and dramatically. This is why we look at longer time frames when making decisions and invest across different asset classes. Over the longer term diversified investment portfolios, such as our Balanced option, with exposure to shares, unlisted assets, bonds and cash, outperform pure cash portfolios.
Our investment strategy when markets are volatile
We believe the reasons for the current panic in markets are temporary and economies will recover, but it will be a very slow process for countries such as the US and many in Europe. We have been, and will continue to, closely monitor the situation in Europe and the USA. We are staying invested in our current share portfolios, while investing new fund inflows in Cash, We will look for buying opportunities when we believe market conditions won’t deteriorate further.
Remember the long term when markets are volatile
During periods of share market volatility we always see a spike in members switching, mostly from options such as Balanced, High Growth and Australian and International shares (with larger exposure to equity investments) into what they regard as lower risk investment options. Picking short-term signals and anticipating when and which way markets will move is something even professional investors don’t always manage to do successfully. If you switch out of shares you always risk missing the early stages of an upswing and potentially some of the biggest returns from this asset class.
So are shares too risky?
When you remember that the ultimate goal of superannuation is to provide an adequate retirement income and that it is usually invested over many decades, the main risk is that your superannuation will not provide the long-term return you had planned for. Over the long term, returns from cash and other asset classes have fallen short of those provided by shares.
We urge our members to remember that their superannuation is a long-term investment and that one of the key risks in investing for retirement is that members do not invest in assets which will grow sufficiently to fund their retirement. While shares can be volatile in the short-term, over the long-term that volatility historically has evened out and returns have followed a rising path. Although investment options with high exposure to shares can provide negative short-term returns, they nevertheless have historically provided the highest long-term returns.
Given most members have a long investment horizon – which increasingly continues beyond retirement – it is important to invest with the objective of providing the highest possible retirement income for the longest possible period, rather than simply maximising the account balance at retirement. By investing in cash or other assets that have less short-term volatility members are risking the adequacy of their retirement savings.
If you are thinking about switching your investment option we urge you to consult a licensed adviser, who can provide you with advice about your investment strategy, based on your personal situation and goals.