Investment market cycles – how they work and what they mean for your super

Investment markets move in cycles that can be challenging to predict. However, a basic understanding of how market cycles work can help you understand why your super balance might fluctuate from time to time. These ups and downs also highlight why a long-term view may be helpful when it comes to your super.

By looking at market cycles you can start to understand that market fluctuations are an expected part of a long-term investing.

5 key phases of an investment market cycle

Market cycles are named cycles for a reason – they’re patterns that reoccur in investment markets over time.

There are 5 key phases within an investment market cycle:

  1. Early Upswing
  2. Bull Market
  3. Peak (top)
  4. Bear Market  
  5. Trough (bottom)

and then the cycle starts again.

 

The 5 key phases of a market cycle

Early Upswing

This is the phase after the market has bottomed out. It’s when the market is starting to recover, and prices are rising again. An improved outlook and cheaper prices attract investors back into to the market. This stage can last weeks, months or several years.

Bull Market

A Bull Market is when investor confidence is strong and  prices are rising faster than average over a consistent period. Bull Markets typically (although don’t always) coincide with periods of strong economic growth, and investors are attracted to the potential of higher earnings.
Peak (top) This is the top of the market, when prices are at their highest. Investors see limited further upside and the confidence seen in the Bull Market phase starts to level out. Investors start to think about when to exit the market by selling. Actual peaks can be hard to predict, but easy to see in hindsight.
Bear Market This is where the market experiences a period of falling prices. They are typically driven by negative investor sentiment and/or a poor economic outlook. They are often associated with economic downturns (e.g. the Great Depression and the Global Financial Crisis). The technical definition of a Bear Market is when asset prices have fallen by more than 20% from their recent highs.
Trough (bottom) This is the bottom of the cycle, when prices and investor sentiment are at their lowest.

 

How long is a complete market cycle?

A full market cycle is the period it takes to move through all stages of the market cycle – i.e. from one Trough to the next.

However, each of the underlying phases can vary significantly in length, sometimes lasting weeks, other times years. There is no shortage of underlying factors affecting each stage - examples include trade issues between countries, commodity prices, interest rates, investor sentiment, changing economic conditions, and of course pandemics.

As a result, market cycles vary in length.

 

The impact of market cycles on asset classes

Different asset classes perform differently as we move through the stages of a market cycle. This is usually a function of the amount of risk associated with investing in that asset class.

Higher risk investments tend to perform well when markets are rising (e.g. Bull Market) and underperform when markets are falling.

In a Bear Market for example, riskier investments such as shares often perform poorly in comparison to more defensive investments like fixed income and cash.

For this reason, owning a diversified portfolio could help reduce volatility in portfolio returns and positively impact your super balance.

 

AustralianSuper navigates market cycles for members

AustralianSuper has a strong long-term track record of managing members’ retirement savings through market cycles. 

The Balanced option, where most members are invested, is the top performing super fund over 5, 10 and 15 years to 30 June 2020 in the SuperRatings survey1. And if a member had invested in AustralianSuper’s Balanced option over the 20 years to 30 June 2020, they would have more than quadrupled their retirement savings2.

 

AustralianSuper Balanced option – long term performance over 20 years
Values of investment

Based on returns less investment fees, the percentage based administration fee deducted from returns and taxes. Doesn’t include administration, insurance and other fees and costs that are deducted from account balances. Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns

 

AustralianSuper’s investment approach

AustralianSuper’s 170-strong global investment team continually assesses economic and investment data to help formulate and adjust its investment strategies. And by investing in a mix of assets (a diversified approach), the team aims to further reduce risk, maximise investment opportunities and grow members’ retirement savings.

The benefits of this approach can be seen in the recent market downturn. Despite the Australian share market losing -7.61% over FY19/20 (and being down -29.25% at its lowest, on 23 March 2020), and international markets falling as much as -32.38% during the period (Peak to Trough, 19 February to 23 March 2020), AustralianSuper’s Balanced option delivered a positive return of 0.52% for FY19/203.

Switching investment options

It’s important to remember that your super is a long-term investment, even for most people in retirement. While changes in your balance can be worrying, markets fluctuations are normal (as we can see from the above) and that’s why keeping a long term focus is important.

If you make decisions based on short-term considerations, you could be worse off in the long run. This includes activities like switching investment options or withdrawing super early, which can both have a significant impact on how much super you’ll have when you retire. 

READ MORE: POTENTIAL RISKS OF SWITCHING INVESTMENT OPTIONS

 

Stay connected to your super

Market cycles affect your balance, and while it might be alarming to see your savings drop, you can also see them bounce back as well. The free AustralianSuper app lets you monitor your balance and review your investment options. You can also log into the member area of the site to review your details and see how your super is performing.

 

DOWNLOAD THE AUSTRALIANSUPER APP

 

Sources:
1. SuperRatings Fund Crediting Rate Survey, SR50 Balanced (60-76) Index 30 June 2020.
2. AustralianSuper investment returns are based on crediting rates, which are returns less investment fees, the percentage based administration fee deducted from returns (applicable from 1 April 2020) and taxes. Doesn’t include administration, insurance and other fees and costs that are deducted from account balances. Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns.
3. Source: MSCI All Country World ex Australia Index (in local currency), S&P/ASX 300 Accumulation Index; AustralianSuper, Balanced Fund performance.”

Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement available at australiansuper.com/pds. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.

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