How investment market volatility could affect your super

You may hear about investment market volatility and think it has nothing to do with you, especially if you don’t own any investments, such as shares.

So, it may surprise you to learn that most working Australians are investors in the share market through their super. In fact, Australia’s super funds are one of the major investors in the Australian share market, owning 39% of the Australian Securities Exchange’s (ASX) total shares, worth $700 billion in 2019.

Super funds also invest in other types of investments such as global shares, cash, fixed income, bonds, both listed and unlisted infrastructure, both listed and unlisted property, and private equity. Each of these has its own risk profile; assets such as shares, infrastructure, property and private equity tend to be more volatile – or prone to share price fluctuations – but this higher level of risk usually comes with higher financial returns. By contrast, investments such as cash and bonds are lower risk, but the amount of money you can earn from these investments is also typically lower.

Choosing your investment option

While you may not necessarily select which assets your fund invests in on your behalf, you can have control over how your super is invested more broadly by contacting your super fund and choosing an investment option. While the investment options differ from fund to fund, most offer options such as conservative, balanced, growth and high growth. As the names indicate, the risk and return profile of each option is different.

A conservative option would typically be lower risk, with a larger percentage of your money in cash, fixed income and bonds and a focus on preserving your super balance. Generally, this type of option would usually be fairly low risk and provide lower stable financial returns. A high growth option would typically invest a larger percentage of your money in shares, infrastructure, property and private equity, with a focus on growing your super balance. The level of return has the potential to be high as is the level of risk, depending on market cycles.

If you don’t choose an investment option, the default option for most funds is either a balanced or growth option – and around 80% of Australian super accounts are invested in their fund’s default option. This means that for most Australians, while your super may have some exposure to higher-risk assets, this would be balanced by lower-risk assets.

What to do when investment markets are volatile

Whether the impact of investment market volatility is something you should focus on probably depends on how close you are to retiring.

• Young people and mid-lifers

Depending on what your long-term objectives are, if you’re a young person or mid-lifer who is accumulating super and whose retirement is some way away, investment market falls may be of less concern. Super is a long-term investment, and history indicates that markets do eventually recover, so it may be best to turn down the noise and remain focused on your long-term objectives. You can always speak to a professional adviser and consider all your options before deciding what the best long-term strategy is for you.

If you switch investment options from a higher-risk option to a lower-risk one during a market fall this means your super fund will sell the higher-risk assets it owns on your behalf to buy the new lower-risk assets. As a consequence, the high-risk assets may be sold at lower prices and this can in turn lock in the losses. It also means that you might miss out on the growth that comes when markets recover.

When markets fall it’s worth looking at the positives and when it comes to your super there are a couple. Firstly, Australian super funds have performed strongly over the past few years, so your super has probably been growing at a rate above historical averages. Secondly, for people with a long-term investment horizon, investment market falls can be beneficial, as they allow your super fund to buy investments at a lower cost now, and these have the potential to rise in value over time.

• Pre-retirees

For those closer to retirement, it can be more difficult to overlook and ignore investment market volatility. As you approach retirement, you may be invested in a conservative investment option to protect your super.

If you decide you want to make a change to your investment mix in response to market falls, for an option that offers greater diversity or more protection, doing so when markets are down may mean locking in losses. If you decide to make a change, it may be better to do this gradually after considering all your options and speaking to a professional adviser (if possible).

• Retirees 

People who have already retired and have taken their super can also be affected when investment markets fall. If the money from your super is now invested in an account-based pension (allocated pension or annuity) or similar product, you must meet the Australian Government’s minimum super drawdown requirements. These requirements outline the percentage of the super that must be withdrawn each year, based on your age. To avoid having to sell assets at a loss to fund the drawdown requirements when investment markets fall, it may be worth trying to meet these requirements using other assets, such as cash or term deposits.

Ask the experts

Before making any changes to your super or your income in retirement, it’s important to seek advice from a financial adviser. If you don’t have an adviser but would like to speak to one, you can call AMP on 131 267 or use our find an adviser search function.

^{1 Rainmaker Information, By 2033 super funds in Australia will control more than half the ASX, May 2019.
2 Super Guide, Choosing an investment option.}