Linking investment returns to market returns
Understanding how market movements can impact investment returns is a key strategy for achieving long-term goals.
It’s more than likely your self-managed super fund (SMSF) will hold a wide range of investments such as shares, property and cash, among other assets. Some of these investments may be listed on share markets, and their prices will change daily.
As a result, the value of the assets in your fund will move up and down as the value of markets changes. For many investors, shares represent a large component of their overall super portfolio. So it’s important to understand how movements in share markets can impact investment returns.
Market falls amid global fears
Over the March 2016 quarter share market returns were weak, due to concerns about global economic growth. Additionally, highly volatile trading conditions and evidence of weaker than expected growth in China weighed heavily on the Australian share market. In the year to 31 March 2016 the return on Australian shares, as measured by the S&P ASX200, was -9.6 per cent.
Over the same period international shares, as measured by the MSCI World (excluding Australia) Index returned -3.9 per cent before currency impacts and -3.1 per cent when currency impacts are taken into account. The recent rise in the Australian dollar has affected unhedged returns from international shares.
While equities market falls can be concerning they are a normal part of the way the share market works. If you have an investment in shares through your SMSF it’s critical to recognise that in some periods your investments may fall in value. It’s also important to understand that selling your shares in a downturn usually means realising a loss, something that may be avoidable if you hold onto the shares until markets recover.
Adjusting to a lower-return world
The environment for returns today is far more constrained than in the past. The combination of low inflation and muted global growth means single-digit annual returns are more likely over the longer term than double digit returns. For the next five to 10 years the return on a typical balanced super fund is likely to be 7.0 per cent to 7.5 per cent a year, compared to the average 14 per cent per annum return achieved between 1982 and 20071. Given inflation is now much lower, this is a healthy result in real, inflation-adjusted terms.
If you have invested for the long term, don't be too concerned by short-term ups and downs in markets. It’s important to turn down the noise of short-term market performance and stick to your long-term super strategy. After all, super is a long-term investment.
We all want to avoid seeing our hard-earned investment dollars go backwards. Getting your investment mix right and keeping it right for your situation is an ongoing process that requires regular attention.
Your SMSF’s long-term investment strategy can provide a valuable focal point during periods of uncertainty and help you stay on track to achieve your goals.
1Based on a theoretical diversified growth mix of assets (with franking credits and pre-fees and taxes).
Source: Bloomberg ,AMP Capital, as at 31 March 2016; Australian shares: S&P ASX 200 Accumulation; International shares (unhedged): MSCI World ex AU Accumulation (AUD); International shares (hedged): MSCI World ex AU Accumulation Hedged AUD; Australian listed property: S&P ASX 200 A-REIT Accumulation; Global listed property (hedged): FTSE EPRA/NAREIT Deve Rental Hedged AUD Blended; Australian bonds: Bloomberg AusBond Composite 0+ Yr Index; International bonds (hedged): Barclays Global Aggregate Index Hedged AUD; Cash: Bloomberg AusBond Bank Bill Index