Superannuation and Market Crash 2018 - How It Could Affect Super Balances
The most dreadful drop in the global share in 2018 which the experts say would be like the 1929 Stock Market crash, and could affect everyone including the Australian share market and everyone who has a super account, has begun.
Millions of Australians have seen not just their direct shares in investment take a pummelling, but also their superannuation in the past. The big question now is how to respond to this new big shake out?
It certainly looks like your superannuation would take a hit, not least as Australian retirement funds are usually more exposed to the share market. When the S&P ASX 200 dropped 40% between March 2008 and March 2009, most of us didn’t have choice but simply went along. It was a very long way down.
The meltdowns in the past were then followed by what appears like a recovery, as bargain hunters look around to seek undervalued shares of which there are lots.
What the experts have to say about it
With billions of wiped off market-shared value, the understandable temptation is to get out of the market. But financial planners say that would be a big mistake.
Because what Australians do then is realize a loss and make sure that they’re not going to benefit from the upside of the market that will come. In fact, financial planners believe that for people with a long-term time frame, now is the time to be investing more in the share market.
This is a good buying opportunity because they’re buying shares now with the monthly contributions into super and a lot of the price. So when the market recovers and the price improves, they end up making more money as a result.
Now is not the time for investors to panic
We saw that the last time there was market volatility during the global financial crisis, the vast majority of people who made quick snap ledger decisions to get out of their investments and into cash investments got out of the wrong time and then crystallized their loses.
Is your superannuation ready for the next fall?
Is your Superannuation ready for the next market fall? What can you do to prevent getting a major hit on your super investments as the market crashes? Discussed below are some of the things you can do to keep your strong in the face of collapse.
Do you want complete control over your superannuation? A self-managed super fund or SMSF may be good for you. However, with great choices comes great responsibility. It can be laborious and you have to monitor and review you investment regularly compared to when you use a regular fund.
With investing in cash, you can manage your investments and contributions online. You will save a lot of money on admin charges and also have complete access to transactions, share prices, and current investments. In the meantime, bonds permit investors to acquire interest from a company or the government, which you have lent your money to.
Since both bonds and cash have greater income certainty, they can play a crucial role in protecting your asset portfolio once the share market is beginning to shake and the economic growth is slow.
You can find more information about SMSFs in our SMSFs Guide
Free yourself from fees
When it comes to super, paying excessive fees is a common error people make, but this can be addressed. You can review the admin fees you pay on your super account and compare it with other similar super funds. You will find the lowest charges and acquire thousands of cash more during retirement.
Have you had a couple of jobs in your career? You can consolidate your super into a single account if you haven’t done it yet. Having several accounts will result in double-ups in admin fees, pointlessly draining you fund.
Regardless of what stage you currently are in your life, it just pays to know about the various ways to increase your super. As market fluctuation happens anytime, making a couple of changes to your superannuation can lift up your balance hugely over time.
Super funds in Australia in general lost at least $160 billion during the period of December 2007 to June 2009, partly since the general balanced portfolio - wherein the majority of superannuation money is kept - is mainly shares.
Much of this loss is currently being made up, as long as your account gets enough time to withstand the market volatility and recover.
The middle super growth fund acquired 9.8% in market value during the 2014–15 financial years as reported by Chant West. The majority of superannuation funds have provided positive returns over the last 6 years.
The median super growth fund gained value of 9.8% in the 2014–15 financial years as reported by rating company Chant West. Most superannuation funds have delivered great returns for the last consecutive 6 years.
Retirement risk zone
The amount of financial hurt the current share market brings to bear varies according to how near retirement is to you. If you must access you super soon, you will usually take a more considerable hit from this compared to the younger workers.
A previous CHOICE study that investigates how the GFC affects superannuation accounts concentrated on retirement risk zone - approximately 5 years before and after retirement - when your account is vulnerable to significant market drops.
A 10% downturn in the share market globally translates approximately in to a 5% drop in your superannuation account. The global share market has begun to downturn this year. So it is all just a matter of how long it will take to make up for the loss.
Are you well allocated?
Super is a life-long investment. However it is always a good advice for older workers to monitor the short term and speak to their superannuation fund manager regarding asset allocation particularly in the new world of financial interconnectedness.
Super funds in Australia had the most exposure of the share market among the OECD nations throughout the GCF and very few these funds reduce share market exposure while changing from accumulation to the pension phase.
Our investigation showed that the general proportion of superannuation invested within equities falls approximately to 67% (from 74%) as account members reach retirement. The 67% exposure would likely be too much if the Australian share market loses $64 billion without recovering.
Playing it safe if you are near retirement
Within retirement risk zone, playing it safe indicates speaking to you fund manager regarding re-allocating towards fixed-interest products like term deposits or bonds.
Review the risk level within your account and opt for safer options, whether or not you wind up realizing that it is time to cut risk.
For more tips on how to retire with style, refer to our article – Retiring with Style Guide
Who will be most affected by the market crash and what can they do about it?
There are particularly two groups of people who could be vulnerable at the moment – one is those who are planning to retire in the next six months or so, and have just seen their superannuation balances substantially reduced.
Under such circumstances, the decision they have to make is either to decide that they’re going to retire during that time; in which case then perhaps the level of income they can expect to take in retirement would be lower than what they originally anticipated, or they have to go back and think about whether they could make further contributions to super, or even think about delaying their retirement.
The second immediately vulnerable group are those people with marginal loans. If you are in a situation where you do have the marginal loans, there are only two options; you can either pay cash to make further investments, or you are forced to share your shares.
Then there’s the retirees living off the interest from their investments while nervously hoping that the current financial market upheaval doesn’t prompt the reserve bank to cut interest rates.
What a market crash indicates at street level
As stock markets keep on falling internationally, it is quite easy for economic experts to try to explain it all just to forget that a lot of Australians do not know what they are talking about.
So let us breathe and try to understand in lay man’s term what a “share market crash” truly means.
Let us begin with a business that a lot of Australians have familiarized recently – the humble taco food truck.
Imagine this: several years ago, ten pals decided to fix ten trucks at $10,000 a pop along with everything required to serve tacos.
The business booms and the pals realize that large appetite for their product. During this point, if they raise sufficient capital, they can buy more truck of 100, and they all get incredibly rich.
After jumping through numerous legal hoops, the group gains permission to provide shares to the public – sold through the Australian Securities Exchange (ASX).
Let us say that the shares cost $1 each, and the group manages to sell 900,000 worth to investors.
Included to the initial “equity” owned by the ten friends, the company is currently worth $1 million with 100 trucks costing $10,000 each.
The investors do not stump up cash just for fun. They expect everything to turn a profit and to be distributed every year as a dividend.
If the profits are excellent, then the “yield” on every share will increase – there will be further profits to share.
This makes every share worth more to the investor – Grandpa Smith, who can get 2% interest in his savings account, may choose to purchase the company.
He may decide that he is happy to pay $1.50 for every share and thus utilizes his online trading account to “bid” such amount to get a couple more shares.
Other investors will sell shares at various prices.
The stock exchange’s role is to place those offers and bids side by side, and permits transactions to occur where the bid-offer pairs mix up.
Anything can affect share prices. Another company may take market share with its yummy Asian food; 12 taco trucks may be washed away in extreme flood and take several months to fix; or Kylie Jenner may release a book – Taco Secrets – and increase the demand for tacos.
Investors react to such events by altering their offers or bid.
Moreover, share prices can change because of external “macro” factors, which are changes in the tax rates, inflation rates, economic growth rates, and so on.
Occasionally, investors bid up a share’s price without reference to these things; they purchase a share just because it is increasing in value, hoping to resell it before the price goes down again.
When this sort of “speculative bubble” occurs, investors ultimately quit risking excessively in return for little because yields get thinner as shares gets costlier.
When that occurs, some begin to “take profits” via selling their stakes. The price declines a bit and more investors begin dumping their shares at extremely lower prices.
Within a short period, there are more sellers than buyers; the few bids still being made are priced low.
That is what we call a “crash,” and when it takes place across the board, the economy can be hammered.
The ten friends’ company may have a 50-cent share following the crash. Therefore, if it wishes to raise capital to finance ten new trucks, it would need to issue 200,000 new shares.
Current shareholders will not like that because it dilutes their returns. And if 100 trucks are utilized to generate a net profit of 50,000, then each of the million shares could receive a 5.00 cent dividend.
However, if 110 trucks generate a profit 10% higher -- that is, $55,000 -- it now needs to be distributed among the 1.2 million shares, which means that the company can truly only afford a 4.58 cent dividend.
Thus stock markets crashes not just to hurt the paper profits of the investor but also limit the ability of businesses to increase capital and create employment, hit retirement savings or income, stop wages growth, as well as destroy consumer confidence.
This is not great at all, which is why I am going to rest now and head to the park and eat a few comfort food - tacos. What else can you even do during a market crash?
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