It goes without saying that 2008 was a challenging year for superannuation funds. Since November 2007, sharemarkets have fallen significantly due to the global financial crisis, and this has led to lower or negative returns for QSuper members. While these results are disappointing, they should be viewed in the context of the overall investment cycle.
A look back at the history of the Australian sharemarket shows that over the past 40 years there have been a number of periods of short-term volatility, where the sharemarket has fallen by more than 10%. While it is impossible to determine when the market will rise or fall, history shows us that, following these periods of volatility, the market has always recovered, and investors who exited the market before the rebound would have missed out on significant gains.4
One of the most important concepts when it comes to investing is that of risk and return. In general, investments that offer the highest potential long-term returns also have the highest risk of negative short-term returns. The graph above shows that for the 40-year period to January 2009, Australian shares outperformed other asset classes such as fixed interest and cash.4 The trade-off for these higher returns is reflected in the periods of short-term volatility; however, investors who remain focused on their long-term investment goals and resist making knee-jerk reactions will benefit over the long term.4
It is also important to understand how investor sentiment and emotion influence the investment cycle. In extreme market conditions such as those we are currently experiencing, many investors allow fear to drive their investment decisions, and exit the market at exactly the wrong time.
However, once investor sentiment changes and the general feeling of fear subsides, markets tend to recover quite quickly4, and those investors who exited the market may find they regret their decision.
How is QSuper positioned?
Prior to the significant falls in global sharemarkets, QIC’s models suggested that shares were overpriced. Therefore, QSuper’s growth investment options were positioned so they had relatively lower exposure to sharemarkets (except QSuper’s Australian Shares and International Shares options) in anticipation of a potential fall in markets.
Now QIC’s models suggest that shares are currently undervalued, and good buying opportunities have emerged. Therefore, QIC has been actively seeking opportunities to buy undervalued quality assets to benefit the longer-term returns for QSuper members.
While no-one can predict when the market will bounce back, we have confidence in the QSuper Board’s investment strategy and our risk management processes. We believe the true value of investments, as reflected by the company’s fundamentals, will prevail in the long term.
Many people think of their superannuation as a single pool of money that is invested with a single objective, for example, to maximise investment potential or reduce the impact of market volatility. However, superannuation can be invested in a broad mix of assets which acts to reduce volatility of returns and improve the probability of achieving targeted objectives.
When deciding on which assets to invest your superannuation in it is important that you have an investment strategy in mind.
Developing this strategy may initially involve looking at your current investments and the current state of the market. You may also consider your personal circumstances, such as how far away you are from retiring and how much risk you are prepared to tolerate.
A key driver of investment performance is asset allocation. Depending on your circumstances, you may find that diversifying your superannuation into a mix of short, medium, or long-term investments could be to your advantage.