Coronavirus crisis: What should I do with my super?
The information in this post is only general advice. There are lots of things to consider if you are thinking about making any changes to your investment strategy. You should seek out financial advice before you make any changes. Please contact our office if we can help you.
Should I switch to cash?
It will depend on your circumstances, but for people that are not close to retiring, the answer is no. You shouldn't be making any changes to your investment strategy.
Investing involves risk. Generally, the higher the average expected return, the more risk there is.
One way we see risk manifest is in volatility. Volatility refers to the unpredictable upwards and downwards shifts of investment value over time.
In the chart below, we can see that the average capital stable portfolio return over fifteen years until 31 December 2019 was 4.0%, while the high growth average was 9.5%.
We can also see that the worst return return over any twelve months for capital stable portfolios was 1.5%, whereas the high growth portfolio worst return was -33.5%. In contrast, the best return over any twelve months for a capital growth portfolio of 7.8% was lower than even the average return for the high growth portfolio; this even after factoring in that twelve month return of 33.5%. And the best return for a high growth portfolio was 34.8%.
If your time frame for investing allows for it then the conventional wisdom is to aim for the strategy with higher average returns and to anticipate the periods of negative returns along the way.
By switching to cash after the downturn, all you do is crystallise losses.
And what happens after a crash?
Historically, after the big falls, there are periods of high growth.
The following table shows the returns over one year and five year periods after the heaviest one day falls in the US stock market. (Don't worry, the principle applies to Australia too.)
So for those that cash out after a fall, not only are they crystallising losses, but they are also missing out on the best returns. It's even worse if you decided to jump back in the market after all the growth and then get hammered again by the next downfall. Timing the market is one of the big mistakes people make with investing.
In summary, the higher the average return on investment, the greater the volatility and incidence of negative returns. Ride out the volatility. Switching to a conservative strategy after a downturn crystallises the loss and makes you miss out on future growth.
Having said that, if you are not someone that can stomach the periods of negative returns of a high growth strategy, then maybe it is not right for you. Have a look at Table 1 above at what kind of negative return you can stomach and accept that over the long term your investment is expected to grow at a lesser rate.