Bad month for SMSFs: some key things to remember
Amid reports about SMSFs being the ‘hardest hit’ by the recent brunt of share market volatility, we provide insights on the global economic and investment outlook
SMSFs and high-growth superannuation funds are likely to have felt the brunt of recent share market. 2015 saw subdued returns for investors as the global economy continued to grow and monetary conditions remained easy, but worries about deflation, plunging commodity prices, fears of an emerging market crisis led by China and uncertainty around the US Federal Reserve’s (Fed) first interest rate hike after seven years with near zero interest rates along with continued soft growth in Australia, saw volatile and soft returns from share markets.
Balanced superannuation funds had returns of around 5%, which was not disastrous given that returns have averaged 10.1% pa over the last three years, but still disappointing. 2016 has started with many of the same fears seen in 2015.
In saying this, despite all the talk of recessions and crashes, returns from a well-diversified mix of assets were still better than cash or bank deposits.
Key things for investors to remember
- The power of compound returns – saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72” it will take 29 years to double an asset’s value if it returns 2.5% pa (ie 72/2.5) but only 9 years if the asset returns 8% pa.
- The cycle lives on – markets cycle up and down and we need to allow for it and not get thrown off by rough patches, like the one we are currently going through.
- Diversify – don’t put all your eggs in one basket and consider active asset allocation to enhance returns/protect against falls.
- Turn down the noise – the information revolution is making us jittery and leading to worse investment decisions.
- Starting point valuations matter – so buy low and sell high. Selling after major falls (like those seen recently) just locks in losses.
- Remember that while share values can be volatile, the dividend or income stream from a well-diversified portfolio of shares is more stable over time (and now much higher) than the income flow from bank deposits.
- Avoid the crowd – because at extremes it’s invariably wrong.
- Focus on investments providing sustainable and decent cash flows – not financial engineering.
- Accept that it’s a low return world to avoid disappointment – low nominal growth & lower bond yields and earnings yields mean lower long term returns. When inflation is 2.5% an 8% return is pretty good.
The bottom line
Global growth remains fragile and constrained and this is continuing to drive bouts of volatility in investment markets. Deflation still remains a bigger threat than inflation – this is flowing from the secular plunge in commodity prices but also from slower potential economic growth. It reinforces the view that interest rates will remain low for longer.
In this environment, diversification and active asset allocation are critical – the uneven and volatile return environment (with Australian shares underperforming again) provided a reminder of the benefits of diversification.
About the author
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.