Most Australians have their superannuation in a “balanced” option but many people would be surprised to know something called “balanced” actually means half their retirement savings is invested in shares.
Super funds have about 30 per cent of the typical balanced option invested in Australian shares and another 20 per cent in overseas shares.
It’s the great returns from shares over the past several years, with support from property, that are mostly behind the terrific returns of balanced investment options.
Most funds have long-term performance targets for their balanced options of at least 3.5 percentage points above inflation. With inflation between 2 to 3 per cent, that means super funds are aiming for returns of 5.5 to 6.5 per cent.
Yet SuperRatings’ figures show most funds have managed to exceed their targets with a typical return of 7.6 per cent over the past seven years.
But there are reasons for believing that the returns are not going to be good over the next few years.
The returns for much of the past seven years reflect the recovery in share prices since the worst of the global financial crisis.
Interest rates around the world are on the rise, though not yet in Australia, which is usually not as good for share prices as when rates are falling.
The outlook for overseas shares is more positive. Even though interest rates are rising, the economic fundamentals are improving.
That’s particularly so in the United States, which makes up about half of global sharemarket indices.
Good company profits will continue to augur well for continued growth in Australian share prices.
Share price rises that underpin the returns of balanced options are likely to remain good, if not as good.
Of course there will be hiccups. Events in the world can always have an impact on shares prices, but the effects are usually short-lived.
It’s best not to try to chase returns.
It’s too easy to come unstuck when acting on views about what markets may do and switching to a more conservative investment option.
It almost always is the wrong call. All you end up doing is switching out of your balanced option when prices have fallen and locking in those losses and then switching back when markets are recovering at higher prices.
I reckon there was only one time when it would have been very beneficial to switch. That was the GFC was starting to unfold 10 years ago.
There were warnings signs that things were unravelling as sharemarkets everywhere were falling. Yet, the Australian sharemarket kept powering on.
Australian share prices are still below their all-time high of about 6800 points reached on November 1, 2007.
But those who have stayed the course would not be too badly off today because of the dividends, particularly the high level of dividends paid by Australian shares.
If a fund member had acted back then they would have a much healthier super account balance now, but no one could have known for sure just how deep and prolonged the slump in share prices would be.
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