Lessons from the past

When markets crash many react emotionally and safeguard their investments by moving to more conservative assets like cash. But is this the right strategy for you? And what can we learn from market volatility in the past?

Stock market image
COVID-19 has caused chaos both in Australian and international equity markets, resulting in a drop in superannuation balances across the board.

But, over recent years there have been a number of other major hits to world markets, including the Commodity Crunch, the aftershocks of USA trade barriers on China, and most prominently, the Global Financial Crisis (GFC). As with many lessons of the past what we can learn from previous volatility is not to panic. Historically, markets have shown that when they take a hit they have also recovered, and those that have stayed with their strategy have reaped the benefits^.

TelstraSuper Balanced Option Performance as at 30 June 2020
For many, the depths of the GFC saw confidence in the market shatter, resulting in them making investment decisions with long-term consequences. For example, let’s take someone in 2006 who had $100,000 invested in super in a balanced option. When confidence was low, they either decided to stay with their original strategy or they switched to cash.

Members who didn’t make changes to their long-term strategy saw their account balance climb after the GFC because they left their investment to recover, rather than crystallise their capital losses. Their $100,000 would now be worth $197,681*.

But the members who switched to cash and then returned when the market recovered (i.e. when the stock market reached its previous peak) had a very different story. Their $100,000 investment is now worth $143,053. That’s about a $55,000 difference. Understandably, in the middle of such a catastrophe any loss will be felt acutely. But changing your strategy when the markets are down means you may miss out on gains when it recovers crystallising losses.

We’re now seeing the same trend with the current COVID-19 pandemic. After super balances fell in March, people were understandably anxious, and some moved their investment from the growth option to cash. However, if they made this decision during the lowest point of the market their super balance would now be $14,000* worse off than if they had stayed the course. Again, we see people who stick with their original strategy benefitting from a market recovery.

We don’t have a crystal ball so it’s impossible for us, or anyone, to predict what will happen with investment markets going forward. COVID-19 has caused some of the biggest market swings in history with 18% being wiped off investment values in late March. The market is still on its way to fully recovering from this massive downturn and it’s still reacting to events surrounding the pandemic. We expect this may continue for a while to come.

Whether you’re planning to be conservative and protect your asset during this time, or take advantage of the market volatility, we recommend that you consult a financial adviser if you require advice that is tailored to you. To book an appointment with a TelstraSuper Financial Planning Adviser call 1300 033 166 or fill in the online form and an Adviser will call you back.

For the latest market updates from our CIO Graeme Miller visit our COVID-19 web destination.

*Based on performance figures as at 30/6/2020.
^Past performance is not a reliable indicator of future performance.