This month marks one year from the depth of the financial crisis, and demonstrates the value of taking a long-term view of investment markets. After another positive month in February, the median superannuation growth fund has returned a satisfying 20.4% for the past year.
Chant West principal, Warren Chant, says the turnaround in fortunes over the past year illustrates the importance of ‘staying the course’ when faced with market volatility.
“During the GFC, some members despaired of seeing their account balances fall and switched out of growth options into cash. While that decision was understandable at the time, it’s probably something they’re regretting now because what they did was lock in their losses and give themselves the added problem of when to get back into growth assets.”
“It’s worth looking back to see how those people who switched to cash fared compared with those who toughed it out in their growth option. While the answer may give no comfort now, hopefully it will help them or others to avoid making the same mistake in the future.” he said.
The only people who benefited from switching to cash were those who did so prior to October 2008, when the full brunt of the fallout from the collapse of Lehman Brothers was initially felt. Someone who switched on 30 September 2008, for example, would already have experienced a 13.2% fall in their growth fund, then achieved a 4.9% return from the cash option, giving them a combined return of -8.9% for the full 28 month period. If they had stayed in the growth fund throughout, their return would have been -12.6%. If they had delayed their switch by just one month to 31 October 2008, they would have been considerably worse off, with a combined return of -16.2%.
Chant says: “The reality is that most of the people who did switch left it too late. They probably got their 2008 statements in September, fretted about them and made their decision late that year or early 2009. Not only did they bear the worst of the negative returns, they also missed out on the best of the positive returns when markets turned back up.
“The answer is that nobody could really have predicted what happened, and unless you were within a year or two of retirement the best thing to do was to sit tight. And if you were within a year or two of retirement, then maybe you shouldn’t have had all your money in a growth option anyway.”