By Seamus Collins, Chief Investment Officer
Major global share markets grew strongly and consistently throughout most of 2021, driven by stronger profits, supportive government spending and historically low interest rates. In fact, 2021 was an exceptional year for super funds, with the median growth super fund delivering returns of 13.4%. The Mine Super Growth option delivered a return of 15.9% and ranked fourth in the top 10 of growth funds for 2021, according to analysis by research agency Chant West.
What is volatility?
Volatility is the variation of an asset value relative to its long-term price trend. This tends to be higher for shares than bonds or cash. Naturally, people are much more concerned about volatility when shares are falling below their long-term trend than when they’re rising above it. Share price volatility is a normal part of long-term investing. It’s a drawback that investors must accept in order to gain the higher expected long-term returns from shares, compared to savings in a bank account.
Returns from share markets depend not just on share prices (which can be quite volatile) but also on the cash dividends which most companies pay periodically to their shareholders, including super funds. Dividends tend to be less volatile than share prices, as they are not necessarily impacted when share prices fall. This reduces the volatility of total share market returns (and returns from your super). This is especially helpful for retirees who are drawing an income from their super savings.
When share markets fall, a well diversified portfolio will generally recover over the long-term. During the 25 years to 31 December 2021, the Australian share market returned 9.06%*, while savings kept in cash (i.e. a bank account) returned just 3.77%*. This means that $10,000 invested in shares at the start of this period would have grown to $87,340, but just $25,227 if kept in a bank account.
Share market losses are only realised if you sell following market tumbles. Staying the course and remaining invested brings the opportunity to benefit from a share market recovery – such as in the year following the COVID-19 stock market crash when Australian shares returned 52.65%.^
Seeing the value of your super go down is never easy. However, super is a long-term investment and share markets generally recover over the longer term. Members approaching retirement should ensure that they have a level of share market exposure that’s appropriate to their own circumstances. Enough to provide some protection against inflation, but not too much that a market crash could damage their retirement plans.
Members who are still some years from retirement should remember that a market fall may be an opportunity to buy new shares (or units in a super fund) at a lower price than before. Over time, they’ll also benefit from compound returns delivering long-term growth to help enjoy a comfortable retirement.
When it comes to super, it’s important to diversify your investments, so you’re not putting all your eggs in one basket, and to consider balancing long-term financial goals against your willingness (or capacity) to live with the risk of losing money, especially over the shorter-term. The general rule is that as the potential for a higher return increases, the risk of loss also becomes greater.