Understanding the risks of switching

The strong recovery in investment markets, after the declines in early 2020, has again highlighted the risks of switching to conservative investment options, like Cash, when markets are falling.

As the COVID-19 pandemic unfolded in the first quarter of 2020, share markets experienced a period of negative returns. This caused some members to panic and to try to minimise losses by switching to more conservative investment options. Doing this meant that some members locked in losses as they sold when markets were down.

Share markets quickly recovered to their pre-pandemic levels. Unfortunately, many members who had switched investment options, didn’t switch back to their original strategy. This had a double negative impact on their savings, as they sold when markets were down and didn’t get back into the market to benefit from the recovery.

 

Super investment option switching examples

Below are 3 hypothetical examples. These show the difference between staying in the Balanced option, compared to switching to Cash, during the March 2020 market downturn. In each case, the member invested in the Balanced option starting from 31 December 2019.

Maureen

Maureen, aged 55, started with $350,000 invested in the Balanced option. She switched to the Cash option on 23 March 2020 and stayed invested in this option to 30 June 2021. By doing this, Maureen was $106,629 worse off than if she had stayed invested in the Balanced option through this period.

A line graph showing the difference in performance between the Balanced and Cash options from 31/3/2020 to 30/6/201 with a starting Balance of $350,000.
Source: AustralianSuper data Returns are based on crediting rates and isn't adjusted for all administration, insurance and other fees and costs that are deducted from account balances.  Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

 

Lesley

For comparison, Lesley, aged 35, also started with $350,000. Lesley also switched to the Cash option on 23 March 2020. Lesley re-evaluated her investment options and switched back to the Balanced option on 30 September 2020. Doing this helped Lesley to benefit from the market recovery. Lesley had a balance of $347,504 on 30 June 2021, which provided extra growth compared to staying in the Cash option.

It’s important to note that Lesley’s switching left her $56,952 worse off compared to having stayed invested in the Balanced option the entire time.

A line graph showing the difference in performance between the Balanced and Cash options from 31/3/2020 to 30/6/201 with a starting Balance of $350,000.
Source: AustralianSuper data Returns are based on crediting rates and isn't adjusted for all administration, insurance and other fees and costs that are deducted from account balances.  Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns. 

 

Wayne

Wayne, a retiree aged 66, started with $750,000 invested in the Choice Income Balanced option. Wayne was taking 5% withdrawals. He also switched his investment to the Cash option on 23 March 2020. This switch meant that Wayne’s account reduced to $575,996 after withdrawals. This compares to a balance of $815,387 as at 30 June 2021, if Wayne had stayed in the Balanced option. (Withdrawal amounts are identical in both scenarios.) This represents a loss of $239,391 by switching.

 

A line graph showing the difference in performance between the Balanced and Cash options from 31/3/2020 to 30/6/201 with a starting Balance of $750,000 in Choice Income.
Source: AustralianSuper data  Returns are based on crediting rates and isn't adjusted for all administration, insurance and other fees and costs that are deducted from account balances.  Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

It's natural to feel anxious when markets are falling, and you see your super balance drop. The scenarios above, show that making reactive changes, may negatively impact your savings.

Take a long-term view of your super

It’s important to remember that your super is a long-term investment. When saving for retirement, you may be accumulating for 20, 30 or even 40 years. Even in retirement, you might need an income from your savings for several decades.

Market ups and downs are a normal part of investing. This is why it’s so important to keep a long-term focus and stay invested in a diversified portfolio. History has shown that the markets increase in value over the long-term. This means members who stay invested in growth assets, often end up in a better position than those who keep changing investment options.

The chart below shows that over a period of 20 years, despite ups and downs in the market, it has grown.

Balanced option growth

Growth of $100,000 from 30 June 2001 to 30 June 2021 in the Balanced option

A chart showing the growth of the Balanced option. A $100,000 investment at 30 June 2001 would be worth $459,207 as at 30 June 2021.

Returns from equivalent options of the ARF and STA super funds are used in calculating return for periods that begin before July 1 2006. Performance is not guaranteed. Past performance in not an indicator of future returns.

 

Before switching investment options

If you’re considering making a change, talk to an adviser. They can help you to make the right investment choices for your personal goals and risk appetite. They can also guide you when investment markets are bumpy. This reassurance may help you to stay calm and focus on your retirement goals.

 

YOUR ADVICE OPTIONS

 

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. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898. 



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