What happens when investment markets fluctuate – ask an adviser

We chatted to financial adviser, Derek Gascoigne about navigating your options when markets are up and down.

In part one of our interview, we discuss market volatility.

When thinking about an investment strategy, how important is it to consider the kind of retirement you want?

This is really important, and it applies to people who are just about to retire, through to those who might still be some years away from retirement. Understanding your desired retirement lifestyle can help shape investment strategy—even if simply expressing it as an aspirational income amount for retirement. For example, ‘I’d like to retire on at least $60,000 per year’.

If your ideal retirement lifestyle is relative to your means – in other words, your super is more than sufficient to provide for your income – then you may decide to pursue an investment strategy less prone to volatility, knowing you don’t need to take on higher levels of risk.

On the other hand, if your savings are less likely to be able to support your desired retirement income, it may be worth considering a higher-risk investment strategy. We do this with a view to obtaining returns necessary to close the gap between how much your super needs to grow, and where it’s currently headed. Taking on a higher-risk strategy means you’d need to be aware of and accept the potentially heightened levels of volatility.

These examples consider how much risk and volatility you may need to take on, as opposed to how much risk you may want to take on. However, there’s no one-size-fits-all approach—hence, it’s essential you seek advice where possible to better understand the considerations in setting up your investment strategy.

People may consider switching investments due to poor short to medium-term performance. What should they consider before switching?

Investment switching in a volatile market can be a dangerous exercise. First, a decision to switch (often to a more conservative, seemingly ‘safer’ strategy) based on poor short-term performance usually means you’re reacting to an event that’s already happened—the horse has already bolted. Second, having made the decision to switch (usually to options with higher allocations to defensive assets), there’s almost always a second decision required about when to switch back. Unfortunately, once the decision is made to switch back, it can be well after a market has recovered and there’s never any obvious ‘signal’ letting you know when that secondary switch should be made.

When deciding what to do based on poor short or medium-term performance, it’s important you don’t make your reference point the time when your account was at its highest value. Instead, focus on the longer-term returns your investment options generate. Performance data only tells us what’s happened, not necessarily what’s going to happen. Planning based on looking back is a bit like driving your car by looking through the rear-vision mirror—you might get lucky for a short while but eventually you’ll crash. Calendar year 2022 was a challenging one for investment returns, but longer-term returns, such as over five and 10 years, are very strong by comparison.

If you’re approaching or just entering retirement, it’s important to remember that just because you’re entering a different phase, it doesn’t mean you’ll stop investing. The average retiree looks to spend the remaining decades of their life in retirement, making their investment horizon still significantly long-term. This means there are still years to recover from a short-term market event.

The key is to ensure you approach retirement with the most appropriate investment strategy to begin with. That means having the discussion and making an informed choice or approach as early as possible to avoid having to consider switching later. This is also a part of mitigating sequencing risk—the risk of receiving lower or negative returns on investments during the early years of retirement, which can significantly impact overall retirement savings longevity.

How might this advice differ for those who feel confident they’re on track to support their desired retirement lifestyle?

The message on switching, is likely to be much the same—stay the course. If you’re in this situation, you may feel more confident about being able to absorb the poorer short-term performance from those options, meaning less thought needs to be given to reacting.

However, those with more aggressive risk appetites may use recent short-term downturns in the market as a buying opportunity to boost future growth—buying low. The guiding principle though should remain largely about how much risk you need to take on, versus how much risk you want to take on.

What are the risks involved with thinking about markets in the short-term?

Psychologically, as humans, we suffer losses far more than we enjoy gains, so we often take actions to soothe our immediate anxieties—but those decisions may not be grounded in logic or reason. Short-term thinking with an asset like super – designed with the long-term in mind – doesn’t stack up. Reacting to short-term market events often isn’t in our best interests.

Wanting to switch out of an option that’s experienced a short-term downturn is usually accompanied by the desire to chase last year’s winner—looking at and switching into an option that’s performed well while your existing option has performed poorly. However, you can never assume last year’s winner will be this year’s winner. Markets are notoriously difficult to predict.

Switching out of an option that’s declined is potentially crystallising a loss. When an account falls in value, the loss isn’t realised until the account is switched or redeemed. It’s like selling a share after its price has fallen. If you switch into an option that’s performed well, you might be buying in at a higher price. This concept of selling low and buying high is the opposite of what investors generally seek to do—buy low, sell high.

It’s often best to stay the course. Yes, your investment option may have had a bad year, but history has shown that all options go through their peaks and troughs and tend to have more good years than bad years.

Derek Gascoigne State manager advice, Vic/Tas

Derek Gascoigne

State Manager Advice, Vic/Tas

Derek Gascoigne has been working in super and financial services for around 25 years. He’s the state manager of UniSuper’s Comprehensive Advice team in Victoria and Tasmania and has been with UniSuper for 13 years.

He loves meeting with clients and managing a team of dedicated and passionate financial advisers.

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The information is of a general nature and doesn't consider your personal circumstances. Before making decisions, you should consider whether the information is appropriate for your circumstances otherwise seek financial advice.
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