Recent share market turbulence has been an unsettling experience to many super fund members and investors in Australia. This has left people wondering why their super fund doesn’t simply sell its shareholdings before big market falls, and wait until things have settled down a bit before re-investing.
This urge can be strong as the onset of major economic events, such as the global financial crisis, look obvious, at least in hindsight.
Unfortunately, things aren’t quite so simple and trying to time share markets can put your long-term financial goals at risk.
Most investors believe that markets are rational – at least in the short term. This doesn’t mean that markets are all-knowing. However, it does mean that the price of shares in a company, or an entire market, reflects all the information that’s available at a specific point in time.
A change in share prices requires new information or an unforeseen event, however minor – in practice this happens continuously, although often in small moves.
An example might be a mining company winning a large-scale order to supply coal to a new steel plant in China, leading its share price to rise, as investors anticipate higher profits. Or the global economy entering a recession upon the outbreak of a pandemic, leading to investors lowering their expectations of future profits.
The key point is that these price changes usually take place rapidly as soon as the new information is made available to the market. This means that to fully benefit from these developments, you must be able to anticipate the underlying event causing these changes (such as the new sales order or pandemic) in advance.
This is clearly very difficult, and the world is not awash with investors that have achieved this successfully over time.
Unfortunately, selling shares at the very top of the market and buying back at the bottom gets even more challenging because you need to get your timing exactly right.
This is because share price movements are rarely smooth, and the gains needed to grow your super are often highly concentrated across a fairly small number of days.
Research by AMP Capital showed that someone invested in Australian shares would have received a return of 8% p.a. (including dividends but excluding franking credits) over the 15 years to March 2020.
An investor who avoided the worst 40 days during this period would have boosted their return to 15.8% p.a. Unfortunately, this is extremely hard to do, and many investors only manage to sell after some or all of the market falls have already occurred.
Getting the timing right when re-entering the market is equally hard – and risky. This is because the best days for shares often follow big price falls, as we saw following the 2020 coronavirus market crash. The AMP Capital data indicates that missing out on the best 40 days of the Australian share market over the same 15-year period would have brought returns down to just 2.2% p.a.!
Investors who try to avoid crashes and then benefit from the subsequent rebound can often be disappointed.
So, what should you do if you’re worried about seeing the value of shares in your super fall?
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 is an opportunity to buy new shares (or units in a super fund) more cheaply than before the market corrected. Over time, they’ll also benefit from compound returns delivering long-term growth to help enjoy a comfortable retirement.
It makes sense to review your super investment options from time to time. Mine Super members are entitled to a complementary initial consultation with an adviser from Mine Super Financial Advice. Click here to book an appointment.
Subscribe to our Super and Investments 101 series now.
Past performance isn’t necessarily an indication of future performance and forecasts are not guaranteed. The risks for each investment option may vary. Check the Product Disclosure Statement before making any investment decision.