Understanding the risks of switching

22 August 2023

Negative news headlines make us all feel uneasy and it’s natural to question the impact these events may have on your super. In times of uncertainty, remember, your super is a long-term investment. While it can be tempting to switch options, staying invested in a diversified portfolio is often the best action you can take. 

Market uncertainty is sometimes triggered by changes in economic outlook and global events. Significant events can restrict growth, but it’s important to think long term. Market ups and downs are a normal part of investing. 

The risks of investment switching

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  Hello everyone, my name is Fern Havea and I’m a Financial Planner with over 14 years’ experience helping people to grow and protect their super.

  Today I’ll be talking about the risks of switching investment options when markets are falling and the importance of staying calm.

  It’s natural to feel like you should be doing something when you’re hearing negative news headlines and seeing your super balance going down.  Many members feel they should switch into more conservative investment options like cash.  While it might feel like you’re protecting your retirement savings by doing this, it may actually have the opposite effect and lock in the losses, as you need to get the timing of both the switch into and out of investment options right. 

  Unfortunately, investment markets don’t provide a signal of how long a downturn may last, or how quickly markets will recover.  This makes it extremely hard to improve your returns by switching options. As some of you might recall, the COVID-19 downturn lasted around 8 weeks and then markets rebounded very quickly.  

  Our data shows us that making decisions based on short-term market movements can often leave members worse off financially, in the long term. 

  Let’s take a look at an example that demonstrates the difference between staying invested in a diversified option like the Balance option compared to switching to the Cash option.

  In this scenario the member had $350,000 invested in the Balanced option on 31 December 2019.

  On 23 March 2020, this member decided to switch from the Balanced option to the Cash option. What they had read in the media about market changes, in relation to COVID-19, fuelled this change. They stayed invested in the Cash option until 31 March 2022. This graph shows the difference in the member’s super balance in the Cash option, compared to the Balanced option. If this member had stayed invested in the Balanced option, their balance at 31 March 2022 would’ve grown to $415,598. Switching to the Cash option resulted in a lower balance of $298,262.  Switching and staying in Cash left this member $117,336 worse off than if they had stayed invested in the Balanced option through this period

  For more examples that show the potential negative impact that switching to cash can have to your retirement balance, I encourage you to read our article titled – understanding switching risks which is on the AustralianSuper website.  This also provides retirement scenarios so that you can see the potential impact of switching when you’re in retirement.

  Let’s now take a look at a 20-year period which shows the substantial growth in value for members who stayed invested in a diversified portfolio, like the Balanced option, through all the market ups and downs.

  Despite different market events including the war in Iraq, the Global Financial Crisis and the COVID-19 Pandemic, over the long term, markets have recovered and moved higher. The next chart shows that over a period of 36 years there have been just 4 years of negative returns.

  It is normal for share markets to go up and down and as we’ve just seen, markets recover after downturns.  Importantly, your investments team here at AustralianSuper have decades of experience in managing your super through all market conditions.  So, when markets are falling, it’s important to stay calm and stick to your long-term investment strategy – even in retirement.  

  If you have trouble doing this, consider speaking to a qualified adviser.  As AustralianSuper members, you have access to a number of advice options, including speaking with someone like me.  We can help guide you so that you make the right decisions for your retirement.

  You can find details on the advice options available to you at australiansuper.com/advice

  End Transcript

Changing market conditions

When markets are rising, you may have concerns you are missing out. When markets are falling, you may feel anxious about potential losses. This is understandable and it can be hard to sit tight and not take immediate action. 

When markets go down, we often speak to members who are considering switching from a diversified investment option, such as AustralianSuper’s Balanced option, to a cash option. Many members think this is a safer place to be. While this may seem like the right choice, you could be locking in investment losses that may be harder to recover from when markets bounce back. A short-term view can have a long-term negative impact on your final retirement balance. 

Look past market turbulence

Looking past market turbulence can be challenging. But history shows that markets increase in value over the long term. By staying invested in a diversified portfolio your super has more opportunity to benefit when markets recover*. 

Members who stay invested in diversified portfolios often end up in a better position in the long term, compared to those who switch investment options. The below examples highlight this. 

History shows that markets bounce back

Despite short-term ups and downs in the market, members' super has grown over the long-term. Overall, staying invested has resulted in a good outcome.

AustralianSuper Balanced option – long-term performance over 20 years

The chart below shows the performance of the Fund’s Balanced option over 20 years, from 30 June 2003 to 30 June 2023. It uses a starting balance of $100,000 and shows how – over 20 years – that balance has grown to $476,675.

Investing for the long term

The Balanced option, where most members are invested, has generated a 10-year average return of 8.60% and a 20-year average annual return of 8.12% as at 30 June 2023. This performance result includes investing through economic downturns like the Global Financial Crisis and the COVID-19 pandemic, while continuing to provide long-term growth for members.

If a member had invested in AustralianSuper’s Balanced option over the 20 years to 30 June 2023, they would’ve more than quadrupled their retirement savings*.

Case study: Members who switched investment options 

Below are two hypothetical examples that demonstrate the difference between staying invested in a diversified option (the Balanced option), compared to switching to the Cash option. The time period covers the March 2020 market downturn, which was brought about in part due to the start of the COVID-19 pandemic.

In each scenario the member invested in the Balanced option from 31 December 2019. 

Claire – switched to the Cash option from the Balanced super option

Claire is 56 and on 31 December 2019 she had a balance of $350,000 invested in the Balanced option. 

On 23 March 2020, Claire decided to switch from the Balanced option to the Cash option. Her concerns about the market sell-off fuelled this change. Claire stayed invested in the Cash option until 30 June 2023.

The chart below shows the growth of Claire’s super in the Cash option, compared to the Balanced option. If Claire stayed invested in the Balanced option, her balance at 30 June 2023 would’ve grown to $425,761. Instead, by switching to the Cash option, she ended up with a balance of $306,316.

Switching and staying in Cash left her $119,445 worse off than if she stayed invested in the Balanced option through this period.

Claire’s super savings in the Cash option compared to the Balanced option

Brent – switched to the Cash option in retirement with an account based pension (Choice Income)

Brent is a retiree aged 67. On 31 December 2019 he had $750,000 invested in the Choice Income Balanced option, AustralianSuper’s account based pension. 

An account based pension lets you access your super as needed. Brent took monthly withdrawals based on an annual amount of 5% of his financial year-end balance. Withdrawal amounts are identical in both scenarios, based on the investment in the Balanced option.

Brent also switched his investment option to Cash on 23 March 2020.

Before he switched, Brent’s account was earning returns from a diversified investment portfolio, the Balanced option. These returns, plus compounding, meant he wasn’t dipping too far into his savings. He was living off the returns that were helping to grow his balance.

Investing in the Balanced option actually boosted his balance, despite him withdrawing cash regularly. On 30 June 2023, his balance would’ve grown to a total of $780,716, even after almost $132,000 in withdrawals, if he remained invested in the Balanced option.

Brent’s decision to switch to the Cash option in 2020 meant his savings earned a lower return. As a result, his withdrawals reduced his balance to $514,426 on 30 June 2023. The difference between staying in the Balanced option or switching to the Cash option was $266,290 – a huge difference due to switching.

Brent’s retirement (account based pension) savings in the Cash option, compared to the Balanced option

These examples demonstrate the potential negative impact that switching to cash can have to your retirement balance. 

Investing for the long term – AustralianSuper’s investment approach

AustralianSuper has an in-house team of over 330 investment professionals as at 30 June 2023. These experts continually assess economic and investment data to help formulate and adjust their investment strategies. 

By investing in a mix of assets, the team aims to further reduce risk, maximise investment opportunities and grow members’ retirement savings over the long term. 

Before switching investment options 

If you’re considering making a change, talk to a financial adviser. They can help you make the right investment choices for your personal goals and risk appetite. A financial adviser can also guide you when investment markets are bumpy, providing reassurance. This could help you stay focused on the long-term and ease any worry you may have. 

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