Due to COVID-19 (Coronavirus), Australia, and the rest of the world, has been
facing a range of challenges across public health, the economy and other
impacts from market volatility. During this time, some members have chosen to
switch to the Cash investment option, with the intent of stabilising their
investment returns over the short-term.
When the COVID-19 virus hit, it
had an almost immediate impact on global markets. Many members of
AustralianSuper and other super funds saw a negative change in their super
balance. This understandably caused some worry.
But, while the Cash option is
designed to provide stable returns over the short-term, it’s important to consider
your long-term objectives and personal circumstances as we navigate our way through
COVID-19 pandemic, and also the impacts that our current economic conditions
may have on Cash option returns.
To do this, we need to first
look at what determines the returns of the Cash option.
Driving factors of Cash option returns
The level of
market interest rates is the primary driver of returns for the Cash investment
option. Higher interest rates would lead to higher returns, and the same goes
for lower interest rates resulting in lower returns. These market interest
rates are derived from the official cash rate set by the Reserve Bank of Australia
Given the state
of the Australian economy (as of 1 July 2020), it’s expected that the RBA will
maintain low interest rates to help support economic growth, until a strong
recovery is in place. The market expects that returns for cash investments will
be low for the foreseeable future. There's also a very high risk that returns
could be lower than inflation over the long-term.
To put it simply
– there is a very high risk that an investment in the Cash option now could
result in your super savings not being able to keep up with rising costs over
Impacts to Cash option returns
While the Cash
option is designed to provide stable returns over the short-term, there are a
number of factors that can impact the returns of the Cash option:
or negative interest rates: While
the current outlook for sustained negative interest rates in Australia is low,
market events could lead to a scenario in which interest rates go below zero.
This has occurred in some overseas markets.
The Cash option can have zero or negative returns after fees, costs and
taxes. When market interest rates are
low, the return of the Cash option may be zero.
Low or negative market interest rates may result in negative returns for
the Cash option.
increase in interest rates:
The Cash option has a small level of interest rate risk which can impact
returns. This is due to the inverse relationship of price and interest rates.
What this means is that a market event that increases interest rates could
reduce the value of current holdings, leading to a negative return for a short
period of time.
READ MORE: REOPENING THE ECONOMY - WHAT DOES IT MEAN FOR SUPER INVESTMENTS
Managing your investment risk
When it comes to your retirement savings, it’s important to understand the investment options available to you and ensure that your investment choices are aligned with your own personal circumstances, financial goals and appetite for risk.
FIND OUT MORE: CHOOSING THE RIGHT INVESTMENT OPTION FOR YOU
No matter what stage of life you’re at, consider speaking to an AustralianSuper adviser for more specific advice on your investment options, super and retirement planning.
EXPLORE: YOUR ADVICE OPTIONS