Hold your nerve on super

Those who pumped money into super before June 30 should be alert but not alarmed: it is probably yet to be invested and has avoided recent sharemarket turmoil. By MICHAEL LAURENCE.

Those with hefty amounts of superannuation invested in the sharemarket should not be spooked by recent volatility; it is all part of a still-rising trend.

By Michael Laurence

Many of the super fund members who rushed to contribute up to $1 million just before the new super regime introduced much-lower annual contribution limits from July 1 would be feeling more than a little uneasy. This is despite the sharemarket yesterday staging its biggest single-day rise for a decade – up by a staggering 4.6%.

The market’s rollercoaster volatility over the past few weeks will inevitably have some of these super fund members nursing sizeable paper losses on these huge contributions without benefiting from the market’s breathtaking gains of the past four years.

But wait. Perhaps most super members who made extra-large contributions on the eve of the new super system may be relatively unscathed.

Graeme Colley, superannuation strategy manager for the self-managed-fund administrator Super Concepts, says most of these contributions flowing into super funds administered by his group would still be sitting in cash. This money would be allocated into the various investment sectors as the members gain, in most cases, professional advice.

And the experience of Super Concepts would reflect what occurred in much of the overall superannuation market, particularly for self-managed super funds, which received much of these contributions.

Relatively few of the extremely large contributions made in the final days of the last financial year would have gone solely into shares. And most of these contributions that had been invested beyond cash would have gone into diversified portfolios of shares, property, bonds and cash. And their diversified portfolios would be providing a buffer against the retreat in share prices.

Probably most of the large contributions of up to $1 million placed with the big superannuation investment platforms would still be sitting in cash as the members progressively invested into the markets through different fund managers.

The portfolios of members who invested all of their contributions straight into the S&P/ASX200 on June 30 would be down by 5% by yesterday’s close of trading, or 4.7% including dividends, calculates Shane Oliver, head of investment strategy and chief economist for AMP Capital Investors. This is not a particularly heavy hit.

And a large contribution on June 30 that was invested in a diversified portfolio that was in line with the classic split of 70% in shares and property with the remainder in bonds and cash would be down only by about 2.5% – depending on the actual investments. (Bonds and unlisted commercial property had actually been rising in recent weeks while share prices were dropping.)

Nevertheless, the rush of money pouring into super to make the June 30 deadline should provide valuable lessons for all investors, whether or not they have anything like a $1 million to invest:

One. Don’t make crucial investment decisions in a rush. The almost blanket advertising towards the end of the financial year urging the contribution of extra-large amounts into super by the June 30 deadline should have made investors uncomfortable.

The Association of Superannuation Funds of Australia (ASFA) estimates that $10 billion more than usual contributions was poured into super funds in the June quarter. The flood of last-minute contributions was truly extraordinary.

One of the fundamental rules of sound investment practice is to never make spur-of-the-moment investment decisions. Always consider your personal circumstances.

Two. Take extreme care when switching from one investment to another. In a rush to invest up to $1 million in super, many investors reportedly sold out of residential property to finance the contributions. When one investment is sold to finance another, careful consideration should be made of the potential of each investment as well as the likely triggering of capital gains tax and transaction costs.

Three. Don’t invest a huge amount in the sharemarket all at once. Progressively invest any particularly large amount into the sharemarket over time, Shane Oliver suggests. This will lessen the likelihood of the capital value being badly hit by a sudden correction. For instance, $1 million might be invested in shares over a year – at $250,000 every three months.

Four. Diversify your portfolio. Professional advisers generally recommend that investors diversify their super and non-super investments in the market sectors in accordance with their personal tolerance to risk and financial needs.

Five. Don’t overreact. By selling a stock in a panic just because it has fallen in price may be simply throwing money away; it might recover and even rise higher within a short time. Just consider yesterday’s price jump. “The best approach is generally to sit tight and ride through a correction,” Oliver says. “Super is a long-term investment.”

Keep in mind that the particularly strong market since March 2003 has been punctuated from time to time by sharp falls.

Six. Look at the longer trend. This should help put the extreme market swings in perspective. Oliver says that while this downturn may prove steeper than those of recent years, it is within a still-rising trend.

Consider the aftermath of the 11 previous falls in Australian share prices of more than 10% since 1989. The market turned around to reach new heights within five months after eight of these downturns. (The 11 downturns do not include the latest round of volatility.)

“The global and Australian economies remain in good shape with US weakness being offset by strength elsewhere,” Oliver says. “Inflation and interest rates remain relatively low [indeed, US interest rates are falling], share valuations are attractive, and the corporate sector is in good shape with low gearing and solid profit growth.

“By the end of the year, I anticipate the Australian sharemarket will be at new heights.”

After yesterday, Australian shares are trading on a forward price/earnings multiple of 14.2 times, which is down from 15.6 times four weeks ago and well below their 10-year average of 15.2 times. In other words, shares are becoming better value and are not over-priced on these terms.