Avoid doing serious damage to your super in falling markets

Retirees who sell off their stocks quickly erode savings and make it more difficult when markets eventually recover.

Retirees are warned to avoid withdrawing big chunks of savings from their super accounts because of the risk of locking in losses in falling markets. Those saving for their retirement are also being urged to avoid big switches between asset classes, such as selling shares for lower-risk fixed income, that could crystallise sharemarket losses.
This particularly applies to younger savers whose funds have decades to recover, say financial advisers and other super specialists.

Paul Moran, principal of Moran Partners Financial Planning, says retirees and those coming up to retirement should avoid making big withdrawals from their equity funds as markets continue to fall.

Retirees who sell off their stocks quickly erode savings and make it more difficult to rebuild fund values when markets eventually start to recover, Moran warns.

“Don’t become a forced seller at lower prices,” Moran says. “It means more shares have to be sold at discounted prices to make up the amount being taken out, which results in fewer shares owned." Many may be tempted to sell shares to meet immediate cash requirements.

Ian Silk, chief executive of AustralianSuper, which has about $180 billion under management, urges those coming up to retirement to put the losses "into some context".

Silk says during the past decade balanced funds have produced "extraordinary" double-digit returns during seven of the past 10 years, with single-digit returns during the remainder.

"It is a stockmarket correction," he says. Silk urges younger investors, many of whom will be investing for the next 60 years, "not to act precipitatedly, unless there are particular reasons".

Some retail pension funds allow asset segregation, which means splitting a fund into two or more pools, such as blue chips, fixed income or cash.

A scheme member who draws down, say, $30,000 in cash is not forfeiting sharemarket gains or selling at a possible loss.

Trickle of losses become an avalanche

Super savers are estimated to have lost about $290 billion as the financial impact of COVID-19 hits the nation’s $2.8 trillion pool of retirement funds.

Since the beginning of the financial year, most balanced funds have fallen between six and nine per cent.

Losses have increased since late last month when the virus began to spread globally and sharemarkets plunged.

"History shows that investors who pull money out and put it into cash at times of crisis do not get back into the market."
Alex Dunnin, director of research at Rainmaker

For example, UniSuper's balanced fund has slipped by about 10 per cent while AustralianSuper's equivalent is down by about 13 per cent, compared to a fall of more than 30 per cent for the S&P/ASX200, says Rainmaker, which monitors super performance.

That has wiped out the past three years of growth from most default funds, says Alex Dunnin, director of research at Rainmaker.

“But those losses contrast with the much larger ASX downturn and go to show that spreading risk through diversification does work," says Dunnin.

Many super savers, particularly those coming up to retirement, are fearful about what to do as COVID-19 continues to spread, infecting countries and their economies and causing sharemarkets to plunge.

“The stockmarket has been very brutal,” says Dunnin about volatile markets. “But it has an uncanny knack of surprising on the upside.”

For example, since the global financial crisis major global indices have piled on gains of about 130 per cent, with the average balanced fund posting about 15 per cent last year, according to Rainmaker.

“History shows that investors who pull money out and put it into cash at times of crisis do not get back into the market,” Dunnin adds.

Wisdom in doing nothing

Graham Cooke, a manager at Finder, which monitors, rates, fees and performance, says: “It may sound counterintuitive, but the best thing for younger people to do right now is nothing. Those who react drastically to market volatility by switching to cash or defensive options can end up losing out. We saw this after the 2008 global financial crisis.”

Those closer to retirement should consider diversifying if they are too concentrated in a single asset class, such as property, Cooke says.

The accompanying table compiled by Morningstar, which monitors markets and managed funds, shows the sharp increase in losses during the past three weeks as investor concern grew about the potential impact on Australian companies.

Benchmarks for funds with allocations ranging from conservative through to aggressive have slipped from between six and more than 24 per cent, says Morningstar.

Josh Funder, chief executive and managing director of Household Capital, a home equity reverse mortgage specialist, warns the more assets sold to fund retirement, the less available to fund future income.

“Making withdrawals in a negative market crystallises losses,” Funder says. “It also limits the ability to recover losses when markets rebound by reducing the exposure to positive returns.”

According to actuarial calculations by Household Capital, a loss of 10 per cent requires an 11 per cent gain to recoup that loss, 30 per cent requires a gain of 43 per cent and 40 per cent a return of 67 per cent to get back to the original position.

Financial advisers are recommending that retirees use any spare cash before dipping into superannuation, if possible.

Greg Newbegin, a 56-year-old manager with a communications group, believes falling prices of top blue chip stocks are creating buying opportunities for those with extra cash.

Newbegin says: “There is no point in getting out of equities. I plan to buy up blue chips – but I don’t think it has yet reached the bottom.”

He also understands about $130 billion of mandated Australian super contributions are going into equity and fixed income assets each year, creating demand for quality assets.

But for others, the government is allowing the withdrawal of $20,000 from super funds – in two annual $10,000 tranches – as a last resort for individuals in financial stress.

The "safe" withdrawal rate for retirement income – with the amount set at the start of the drawdown period and remaining constant – is about 4 per cent of assets a year over 20 years, according to US research.

Original article on The Australian