7 April 2025
The nature of investing is that markets go up and down. Superannuation is a long term investment, designed to see you through your working life, so market movement is something super funds prepare for.
Share markets around the world have taken significant hits recently as the market responds to negative sentiment around Trump’s tariffs.
What happened in markets?
Some market moves recently have been extreme in scale even compared to historic moments of stress, like at the start of the Covid pandemic. While market falls are concerning, this is something that we prepare for carefully, with the aim of protecting members’ retirement savings while continuing to provide exposure to markets.
Late last year, following the election of Donald Trump, markets were buoyant in the expectation that the new US administration’s policies could be positive for economic growth. While we recognised the possibilities, we considered market optimism overdone and the team started moving towards a more defensive investment strategy. This means investing more in assets that are less volatile, like bonds and cash.
When we were thinking about how to position portfolios, we also considered the Australian share market expensive given the outlook. International shares appeared more attractive to our team because of the more diverse industry mix and foreign currency exposure, as the Australian dollar typically falls when economic growth slows. We’ve seen that now, with the AUD plunging to the lowest it’s been since Covid.
How are we responding?
As the crisis unfolded the team has been monitoring portfolios. Initially the team moved the strategy to be more defensive, meaning the exposure to shares traded in stock markets is significantly lower than was the case at the start of the year. In addition to this shift, the team decided to increase exposure to foreign currency anticipating that the Australian dollar may fall.
We have increased our scrutiny of our investment strategies to evaluate their robustness to market stress. Although expecting continued challenges the team are aware to the possibility that markets rebound rapidly, perhaps if tariff levels reduce. We want to be positioned to capitalise on that upside if markets bounce back. So we’re making sure cash is available to purchase assets in that scenario.
We carry significant funds in cash, so that when the market stabilises and looks ready to improve, the team will be able to re-invest in international equity markets to ensure members receive the growth benefits.
Periods where markets are volatile are not that unusual. In just the last five years we’ve seen markets react strongly to Covid waves and the war in Ukraine.
While this market dip is significant, this kind of volatility is something super funds are prepared for and super products are designed to withstand.
How super works when markets go down
Every super investment option is designed to withstand a certain number of years of negative returns over a 20 year period.
It’s a good idea to take a look at the Product Disclosure Statement (PDS) if you’re worried about performance. In the PDS, you’ll be able to see the goals and expectations for each investment option.
For example, in a balanced investment option at least 6 negative annual returns over any 20-year period might be estimated. Those periods of negative performance are factored into the investment strategy for your super. So using the example of a balanced investment option, that means even if markets fall for 6 years your super will still be working how it’s supposed to and setting you up for retirement.
What is diversification and how does it work?
Most super options are not just invested in share markets. Most balanced options are invested in shares alongside bonds, cash and alternative assets like property and infrastructure.
Super funds invest in this way because it allows their members to benefit from diversification. Diversification is creating a mixture of assets that all behave in different ways.
Investment teams at super funds create diversified portfolios to absorb the impact of market shocks. So when stock markets go down, if you’re in a diversified investment option, you shouldn’t see the full impact of those market losses in your statement. You may still see a quarter or year of negative returns, but through diversification that impact will be less than it would have been if you only invested in stocks.
What to do when you see negative returns in super
Seeing negative returns in your super can be worrying. But the most important thing to know is super is a long term investment. Try not to focus on short term returns.
If your investment option is new you might not be able to see long term returns, but if you’re in an older option try to consider the 10 year returns as a good indicator of longer term performance. Past performance is not a reliable indicator of future performance but it can start to give you an idea for how an investment product behaves.
During the market volatility at the start of the Covid pandemic, some people decided that they would be better off not having any exposure to stock markets at all and instead moving to cash-only investment options (some super funds offer cash-only options). Since some time has passed, we now have data on how that worked out. Unfortunately, research found that members in the averaged super balanced option who switched to cash in April 2020 would have lost up to 27% by July 2021.
This is more evidence that it’s important not to panic when markets go down, and to think long term. Making moves when markets are at a low can result in realising losses, often it can be more sensible to just ride volatility out.
If you’re considering options for your super, we recommend you seek personal financial advice before making a decision.
Contact our Coach team on 1300 COACH 9 (1300 262 249) or email coach@childcaresuper.com.au.