Stock market volatility

The global financial crisis and its effect on superannuation

It seems that everything we see and read at the moment is talking about a ‘global financial crisis’. 

Bernie Fraser, former Governor of the Reserve Bank, recently spoke to industry super fund members via a nation-wide television address.  He highlighted the comparative performance of industry funds versus retail master trusts over many years.  People in an industry fund are best-placed to weather the storm as they pay lower fees and do not pay any commissions to financial advisors. 

You can watch the video by clicking on the image below: 

Many members have contacted us and most have two questions:

1. What exactly is happening?

World financial markets (stocks, bonds, commodity prices, etc) are highly volatile at the moment.  The last month in particular has been very severe, with wild movements both positive and negative.

This volatility is the result of a combination of things, most notably the US home loan sector (you’ve probably heard about the “sub-prime crisis”).  The follow-on effects of this are very significant for both the economy and investment returns. 

Bad decisions by major financial institutions in the US and Europe have seen their very existence threatened, with some even going under and others being taken over by governments or business rivals in a stronger position. 
 
Unfortunately, it is impossible to predict exactly how long this climate of uncertainty will be with us.   As a result, we are likely to continue to experience volatile investment returns at least in the short term.   By volatile we don’t just mean further negative returns. In fact, we expect markets to continue to behave in a reactionary manner.  In other words, we expect to experience positive returns when good news and developments are announced and vice versa when there is negative news. 

2. How does it affect superannuation?

It is near-impossible to accurately predict when markets will decline or improve.  Some people might be considering changing their investment option, which all members can do at any time.  The challenge though is when you change your investment option into something you feel is more ‘conservative’, you may very well miss out on the upward trend when things improve, as they inevitably do. 

Most super investors have a long-term time horizon for their investments as their retirement age is some time away.  Even then, many people will continue to have their funds invested for the long term so that they can enjoy a retirement income stream. 

Long term investors do not have to panic or react to the current state of investment markets, as all investment markets go up and down in cycles.

The value of share markets

The graph below shows the Australian stock market price movements from 1900 until this year.  As you can see, while there are some significant dips from time to time, in general it continues to rise over the longer term (click on the image to open up a bigger version).

Please note:  This chart is current until mid-2008 and does not reflect market movements after this time.

What is LUCRF Super’s approach to the future?

LUCRF Super manages your money with a strategy of providing long-term growth over your working life, balanced with the need to protect members’ future retirement funds.

Our default Balanced investment option is designed to offer both growth and protection over the long-term. This option mixes Growth Assets, such as shares and property, with Income Assets such as fixed interest and cash.  This approach allows the Fund to capture growth as the markets rise, while providing a measure of stability when the markets are volatile or in decline, just as we experienced during the 2007/08 financial year.

The benefit of this approach can be seen in LUCRF Super’s long-term results. The following table shows the average investment return for the Balanced investment option over the past five years compared to the returns on Cash.

Compounded Average Return from 2004-2008
(Financial years 2003/04 – 2007/08)

Balanced Investment Option	Cash
10.30%	4.91%

Very difficult market conditions (like those which are currently being experienced) mean that many investments will suffer mark downs in the short term and positive returns are not guaranteed. 

The good news for LUCRF Super members though is that the Fund's diversified investment strategy means it is well placed to meet its investment objectives over longer term periods - there is no need for panic.