When the economy and investment markets aren’t doing well, Australians may wonder if they should switch their super to less risky investment options. We look at what the last economic slump - the global financial crisis (GFC) - taught us about the pros and cons of changing your investment mix.

What happened during the GFC?

Between mid 2007 and early 2009, a downturn in the US property market spread from financial institutions in the US to the rest of the world via linkages in the global financial system. There were a range of factors to explain the GFC, which you can read about in more detail on the Reserve Bank of Australia website.

People’s confidence in the economy took a plunge as the value of the share market fell. In fact, between late 2007 and early 2009, the Australian stock market (ASX) fell around 54% over 16 months as a result of the GFC.

Given that most people have some, or even most of their super invested in the sharemarket, this had profound implications for many Australians, especially those looking to retire. After all, the nest egg they’d been saving for many years was suddenly worth less than they’d hoped.

What happened next?

If you had taken a snapshot at the end of the Australian sharemarket slide in March 2009, things would not have looked good. But fortunately, that’s not where the story ends.

Between 2009 and 2019, the ASX grew steadily, eventually surpassing its previous highs. This meant that people who kept putting their money into the ASX over that decade - such as most people contributing to super - saw their balance and the value of the money they put into those investments rise substantially.

On the other hand, those investors who switched their money to cash or other conservative investments as the market fell, had locked in their losses and didn’t experience the same gains when the market started rising again.

Case study: Switching investments versus staying the course post-GFC

Let’s see how this played out by comparing two teachers - Lee and John - both of whom were in exactly the same position in January 2006 before the GFC hit global share markets.

Salary: $72,500 in 2006, rising by 2% a year to $93,786 by 2019
Super balance: $200,000 as at 1 January 2006
Investment choice: Australian Catholic Super’s Balanced Option
Ongoing contributions: 9.5% Superannuation Guarantee contributions made by their employer. Neither teacher made any additional contributions, such as salary sacrificing.

John stays the course

John kept his super invested in the Balanced option throughout the GFC and benefited from the subsequent growth in the share market. By December 2019, his super balance was $482,434 which is 141% higher than it was in January 2006.

Lee switches to cash

Lee grew fearful and moved all of his super out of the Balanced option and into the cash option in March 2009 where it remained. He made the switch as he thought he would reduce further losses. However, that meant he wouldn’t experience the same gains when the stock market lifted.

As a result, by December 2019 his super balance stood at $317,366 which is $165,068 or 34% lower than John’s.

A few takeaways

While it can be tempting to ‘cash out’ when the investment markets dip, it’s likely that doing so will mean you lock in your losses and prevent you from benefiting from any future potential growth in a market rebound. In general, a better approach is to stay the course.*

If you are close to retiring or have retired, you may be worried that you may not have sufficient time to recoup any losses as a result of market downturns.

Having a diversified portfolio across growth assets (such as shares and property) and defensive assets (such as cash and bonds) can help soften the impact of market volatility. Our RetireSmart account-based pension does helps our members take advantage of upswings and insulating your pension payments during market volatility.

If you are in our LifetimeOne default option, we help you manage your risk depending on which age group you fall under. Once members reach 40 years of age, the asset allocation will change gradually, moving from a growth focused asset mix to a more conservative one as a member moves closer to retirement age.

Another thing worth remembering is that retirement doesn’t have to be all or nothing. If you have reached your preservation age, you might consider a transition to retirement pension ;(TTR). This can let you ease into retirement, reducing your hours without reducing your pay. At the same time, it lets you contribute to your super, so that you can continue to build your account balance and ride through another market cycle before you stop working.

Need guidance?

Depending on factors such as your age, investment time horizon, financial goals and risk appetite, your financial situation may be different from another person’s. One way to get holistic guidance that is tailored to you is to speak to a financial adviser.

If you like to speak to one of our financial planners, leave your details and we will contact you to organise an appointment.

*Any advice contained in this document is of a general nature only, and does not take into account your personal objectives, financial situation or needs. Prior to acting on any information in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek independent financial advice if you are unsure of what action to take. Past performance is not a reliable indicator of future performance.