Strategies to navigate in a down market – Superannuation
In the last couple of weeks, I’ve received a large number of phone calls and emails from my clients as most of them experienced a significant drop in their portfolio – both in their superannuation and non-super investments. Navigating a down market has never been an easy task, especially since there is so much noise in the media that encourages people to panic and worry.
We can blame everything happening around us – war, inflation, rising interest rates, and ongoing health crises. However, the biggest impact on whether or not you achieve your financial goals is not the share market itself. Then, what is that? It’s your reaction in a volatile market.
Here are a few strategies you can consider applying to your superannuation in the down market.
1. Stick to your goals and keep contributing to your superannuation
“Do we need to keep contributing to our super?” my self-employed client asked.
“Am I still going to make the salary sacrifice in my super?” a client who is close to his retirement worried.
Most of your superannuation is unitised, and the balance fluctuates based on the investment market. YouWe need to understand that your investment does not always rise. You should expect at least one losing year in every four or five. However, a down market can create massive opportunities for smart investors. If the unit price of your superannuation is $1 for each unit, you can buy 100 units for $100. If the market dropped by 50%, the unit price of each unit would become 50 cents. You can buy 200 units for $100. The market will surely rise again and you can double your investment when the unit price bounces back to $1/each. It’s like buying investments when they are on sale.
The contribution you make to your superannuation in a down market will boost your retirement savings much faster.
2. Contribute more often
Contributing to superannuation once or twice a year is very common for self-employed business owners. When there are high uncertainties in the market, you add money to your superannuation every fortnight or month. You are then reducing the risks and increasing the returns over time. We call it dollar-cost averaging.
Dollar-costs Averaging
| Month | Amount invested | Unit price | Units purchased |
| 1 | $1,000 | $20 | 50 |
| 2 | $1,000 | $15 | 66 |
| 3 | $1,000 | $10 | 100 |
| 4 | $1,000 | $15 | 66 |
| 5 | $1,000 | $20 | 50 |
| Total | $5,000 | 332 |
In the above scenario, you invested $1,000 in your superannuation each month when the market price fell from $20 and then recovered to $20. The units were purchased at an average cost of $15.06 ($5,000/332). After five months, the investment was valued at $6,640 (i.e. 332 units at $20 per unit), and you made a profit of $1,640 ($6,640–$5,000). If the units had been purchased at the commencement of the five months with $20, you would not have made any profit when the units returned to their purchase price at the end of the five-month period. This is how people maximise their superannuation by contributing regularly in a down market.
3. Seek advice and protect your retirement savings
Superannuation is money that you set aside during your working life so that you will have money on which to live during retirement. When you are near retirement or already retired, market volatility may have a significant impact on your retirement lifestyle. It’s time for you to seek advice from a financial adviser who can help you develop strategies to protect your retirement savings.
Sequence risk impacts you most when you are at retirement or very close to retirement, as you draw income from your retirement savings. When you retire and withdraw income from your superannuation, you are selling your investment regularly. You must thus sell more units in your superannuation to obtain the same level of income in the down market.
If there is a bad market just after you retire, then your investment may never recover, but if you retire in a good market, your retirement savings may grow large enough to make your money last longer. Sometimes it is a matter of luck, but we can’t build our future simply on luck. We need strategies and plans.
Asset allocation
Asset allocation is the percentage of growth assets (share and properties) versus defensive assets (fixed interest and cash) which determines the level of risk/return in your superannuation. A trusted adviser will guide you to understand and choose your asset allocation based on your risk tolerance level. The higher the percentage of growth assets, the greater the returns will be over the long term, but the more volatile your investment will be in the short term. One question for pre-retirees or retirees is whether your investment horizon is long enough to overcome the volatility.
Diversification
Diversification will not guarantee any gains, nor protect against losses. It is about managing the risks/rewards trade-off by selecting a mix of investments. A financial adviser can help you achieve more consistent returns over time by diversifying your investment across different asset classes, industries, regions and investment managers.
Putting in place protections
There are products designed for pre-retirees and retirees to protect their retirement savings from market volatility. Those products have the flexibility to adapt asset allocation adjusted by investment managers, or offer a protected retirement income for a fixed period (term) or life, which allows you to invest your retirement savings in a way that increases your investments and protects them so that you can make your money last longer.
In the last two years, we have had average returns of 20-30 per cent in our clients’ portfolios. Warren Buffet once said, ‘A rising tide lifts all boats … only when the tide goes out do you discover who’s been swimming naked’. Volatility is just part of the game. If you understand the patterns and rules of the game, then investment becomes much easier.
General advice disclaimer
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
