How does the BREXIT market fall impact your Super and other investments?

London underground mind the gap sign BREXIT

Ian Chester-Master

By Ian Chester-Master, CFP®, FFPA

The doom and gloom of the BREXIT market fall is heading all of the news cycles at the moment. But what does it really mean for your Superannuation balance and other investments?

Inevitably, when there’s a reasonable fall in the share market, the general media starts its scaremongering, with reports of how people’s Superannuation will be substantially diminished. While I understand that journalists and editors might exaggerate certain news items to pique people’s interest, there also needs to be some kind of balance in their reporting.

If media reports were to trumpet some of the positive aspects to a market fall, perhaps less people would sell out at the bottom – which happens far too often with Super balances. People get scared by the doom-and-gloom reports and switch out of shares and into cash for ‘safety’.

The problem is that their money stays there and then time and compounding work against them; or by the time they want to transfer back (because the media reports that shares are going gangbusters) it is at the top of the market and the downward spiral of retirement balances continues. Such is the nature of emotional investing.

rollercoaster of investor emotion BREXIT superannuation

If everyone is selling….

When there are reports of a sell-off in the market, it is portrayed as a really bad thing. However, for shares to be sold, there must also be buyers – so who is buying during a sell-off?

Without trying to be glib, the answer is simply someone who has the opposite point of view to the the seller.

The motivations behind why someone buys or sells at any point in time are many and various – but the real issue for the average person is about time in the market, not market timing.

In regards to the media, the current fall in share markets is being touted as very negative for Super balances. This kind of reporting leaves the average person fearful about both their Super and shares in general. While I don’t advocate a ‘positive only’ stance, the continually negative and fearful reporting only serves to damage the image of Super, investing and the future retirement balances of ordinary people.

Certainly, you do need to be aware that markets will both rise and fall.

Benefitting from the falls in the market

Let’s see how this can benefit your Super,  i.e. the dollar cost averaging that happens automatically via your SGC contributions being made each quarter.

(NOTE: If you are self-employed and not contributing to Super yourself, then perhaps this will give you a reason to start!)

Let’s look at what happens when you invest $500 per quarter for a turbulent 5-year period, by examining what the headlines are likely to be and what the Superfund newsletter is likely to show versus what actually happens.

 

Investments over time

This is what the media headlines show:

  • Massive stock markets sell off!
  • Markets keep falling – so does the retirement future of many Australians!
  • Horror time for super – down by as much as 50%!
  • Super struggle – Super fund returns show no gains for 5 years!
  • Stock market Rallies – up 40% – investors start to return to the market…

…and the returns shown in your Super fund’s newsletter

  • 1st year: 1year performance:          -50%
  • End of year 5: 5 year performance:          0%

What really happens

We see that the unit price falls by 50% at one point (which is similar to what happened in 2008) and over the next 5 years, it just recovers to its original value. You invested a total of $10,000 and you now have $14,976.

The result over the 5 years is a gross return of 49.7% or a compound annual return of 14.8%.

In reality, that’s a pretty darn good return, you would have to agree.

So, what can we learn?

  1. Your portfolio performance ≠ the Super fund published performance. The returns you see in the newsletters you receive from your Super provider are not necessarily indicative of the return you have actually received.
  2. Volatile markets shouldn’t be feared. You CAN make a decent return in a volatile market.

Here’s a thought

Everyone loves buying items that are on sale, so why not make it your priority to top up your Super when the share market is on sale?

But how will you know?

Just add to your Super any time the headlines are sprouting doom and gloom about a share market sell-off and become one of the buyers!

If you’d like to talk further, feel free to give me a call on 07 3822 7201.


General advice warning

The advice provided is general advice only as in preparing it, we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Ian Chester-Master & Wally Djachenko are Directors and Authorised Representatives of Your Financial Design Pty Ltd.

Your Financial Design is a Corporate Authorised Representative (1233744) of GPS Wealth Ltd | AFSL 254544 | ACL 254544 | ABN 17 005 482 726.