4 April 2020
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Are our super funds a train wreck waiting to happen?

Peter Switzer
21 September 2018

The Dow Jones overnight hit its first record high since January this year, showing how challenging these trade war concerns have been for some of America’s biggest companies. Following this week’s less than serious round of tariffs USA-v-China, which have been described as more of a skirmish rather than a war, stocks have resumed their march higher in the States.

While the rise in the US stock market puts us closer to the day when the inevitable crash will occur (which, along with Citi and Goldman Sachs, I think is still a way off), it got me thinking about the GFC crash and how good our super funds have performed. And it made me ask the question: Are our super funds stock market crash proof?

The starting point to test out this question has to be this: how did we do post-GFC, when stocks fell around 50%, which was the biggest fall since the Great Depression?

The team at superannuation monitors, SuperRatings, has looked at the washup and performance of funds since the crash that started in November 2007 and stretched out to March 2009. I remember it well, as I was writing like I am now and was constantly being asked by the likes of Sky News, the commercial TV stations, the ABC and various radio stations to comment on the very worrying slide in stocks, which looked set to lead to a Great Depression Mk II.

“Ten years since the collapse of US investment bank Lehman Brothers, Australia’s superannuation funds have accumulated over $1 trillion in retirement savings, providing a windfall for members prepared to take a long-term view,” SuperRatings has revealed.

According to their data “members with a balance of $100,000 at the end of August 2008, just days before the Global Financial Crisis (GFC) hit, would today have a nest egg worth $193,887 if they remained in a balanced option. In contrast, members who panicked and shifted their savings to a capital stable option would have a far smaller balance of $164,277!”

I talked to many retirees on my old 2GB Super Show, who actually drew their money out of super to play it safe in term deposits. These people ended up losing twice because they allowed fear to drive their investment decisions. Obviously, over that time, I had to calm the nerves of my financial planning clients. Because of my intimate connection, it was easier to make the case to stay solid with super but it was no cakewalk. These were scary times!

This chart tells the story.

Those who opted for safety after the end of Lehman Brothers saw their $100,000 grow to $131,000 by 31 August 2018, while those growth-oriented super savers watched their nest egg blow out to $201,209 over that time.

This table spells out the returns over time and are a great honour board for super funds generally.

The 10-year returns at 6.6% for most of us in accumulation super funds (that’s what pre-retirees are in) show what the GFC did but the 15-year and 20-year returns shows that these funds, imposed on us by an insightful Paul Keating in 1992, have become great wealth-builders. Returns of 8% and 7.5% over the 15 and 20 year periods is up there with the best funds in the investment world, given the lower risks they take and the lack of leverage or borrowing that other high-performing funds engage in.

SuperRatings has also reminded us about which balanced funds were the best performers or deliverers for Aussie wealth-builders over the past 10 years since Lehman Brothers failed. Here it is:

And if you want to know the latest hotshot performer, here’s another tell-it-all table:

Source: SuperRatings.

You know, you can never give savers and wealth-builders 100% guarantees about anything in the finance world but we experts do believe in triple-A products, such as Australian Government Bonds. And that’s why their returns are so low compared to more risky investment products. That said, our super industry and our best funds in particular, have shown themselves to be very reliable commodities over a long time. Their performance post-GFC is a credit to themselves as responsible bodies and the regulators who have kept a watchful eye over them.

In the future, there will be other GFC-style challenges, but the best takeout message for all of us who want to build up a retirement nest egg, is to choose the right investment option with your super fund, which for most of us should be balanced or growth when you’re under the age of 50. This should ensure you give your fund both time and momentum to really build up.

In your 50s and as you get closer to retirement, you might be in a mix of balanced and conservative options but as we are living into our 80s, people like me stay balanced into their 60s.

Super funds are not totally crash-proof but they are designed to bounce back after a crash. And as long as you select a good one, with a not-too-expensive fee, you will survive and eventually thrive after a stock market crash.

The people who didn’t listen to people like me and who didn’t read me or watch me on TV when I talked to Phil Ruthven from IBISworld in early 2009, when I asked him what history says about stock market rebounds after a crash, really missed out on an important lesson.

Phil said our markets bounce back by 30% to 80% after a serious crash, and if they knew this, they might never have run to the safety of term deposits and, as a consequence, lost twice out of the GFC. 

This underlines the price people pay when they choose to be their own advisers but don’t do the homework needed to actually be an adviser.

Go Super!

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