Market analysts predict moderate growth going forward, but recent sharp declines in equity markets have sparked speculation about whether the investment cycle has reached its peak after a very strong bull run.
How long will it last? More than nine years of continuous growth have made this market cycle the second longest expansion since the 1940s. Individual investors and superannuation funds have certainly reaped the benefits from these returns.
However, uncertainty about the total effect of trade wars on international commerce and geopolitical risks loom in investors’ minds, causing second thoughts about investments in riskier asset classes.
Market sentiment has certainly shifted from the ‘happy days’ of 2017 with low interest rates, low volatility, low unemployment and strong investment returns to the current caution experienced in the second half of calendar year 2018.
So what is the best portfolio position for current market conditions? More or less risk? Is Cash king? Will shares perform as strongly as they have in recent years?
The NGS Super Investment Performance Summary to 30 September 2018 shows a slow growth in all investment options for the first quarter of 2018-2019 financial year.
The default investment option, Diversified (My Super), showed a positive return for the quarter at 1.94% making the five year return 8.44% per annum. As the name denotes the Diversified (My Super) option invests in a wide range of options such as international and Australian shares, direct and indirect property, fixed interest (both government and corporate bonds), infrastructure, emerging markets and Cash and Term Deposits.
It aims to achieve CPI plus 3% over rolling 10 year periods and it was included in the SuperRatings top 10 funds for its performance in the last financial year. As expected, the risk of not achieving its investment objective reduces over time horizons – for five years the risk is medium to high, over 10 years the risk is low to medium and over 20 years the risk is low.
So this option could be suitable for members who are looking for attractive long-term returns who accept a reasonable level of volatility. Over longer periods the expectation of negative returns is three in 20 years.
Of course choice of investments is available to all NGS Super members so that individual portfolios can be tailored to risk tolerance, age and individual objectives. Some questions to consider before making an investment switch would have to do with your age, your other investments (house, mortgage, etc), how long do you expect to be retired for, and how much control do you want over your portfolio. It is prudent to obtain professional advice from a licensed financial planner prior to making any significant changes to your investment mix.
A common practice recommended by many financial planners to hedge against a market downturn is called the bucket’ strategy in the pension phase. This simply means placing some money in a defensive investment option such as Cash and Term Deposits while maintaining other higher risk investments for their growth potential.
This strategy can be useful in times of a market downturn as fortnightly pension payments are arranged to be taken from the defensive investment option (which has a more stable unit price) rather than from the growth investment options (which typically decline in value during periods of volatility).
The ‘bucket’ strategy can protect retirement savings as it is not necessary to draw down from the growth options when their unit price is lower – in keeping with the axiom ‘buy low, sell high’ and avoid ‘selling low’. Financial planners frequently recommend this strategy to protect retirement savings after sharp declines like the market meltdown in 2008 and 2009 – the Global Financial Crisis.
Let’s hope the factors influencing financial markets remain benign for the remainder of 2018 and in to the New Year as the current market cycle grinds to a close.