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COVID-19 and your super - Send us your questions

Hi CHOICE community,

There’s been a lot of talk about how COVID-19 affects the stock market, including superannuation. We are putting together an FAQ piece on this topic to help people make informed decisions and reduce anxiety. To do this we need your help. What questions do you have about the virus and your super? Please let me know in the comments below or send an email to ebarz@choice.com.au

In the meantime you might be interested in our interview with Scott Pape, AKA the Barefoot Investor, about why many people don’t need to panic about their superannuation.

Thanks for your support!

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I’m not really worried about COVID-19 and my super. Super is a long term investment and I “assume” that COVID-19 and its effects will be done and dusted by the time I am drawing from my super - or if it isn’t all done and dusted by then then maybe I have bigger problems than my super balance e.g. zombie apocalypse. :slight_smile:

I only have one question: When will it all be over?

This question isn’t as silly as it sounds. On the one hand, there is a science to this kind of forecasting. On the other hand, the GIGO principle applies. Maybe not enough is known yet to make a realistic forecast.

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I’m 33… I got ripped off on my super by a dodgy employer as a young worker, lost chances to accumulate super whilst studying and birthing/raising child, and the rest was mostly patchy. I’m definitely worried that the little I have will go up in a puff of smoke and glitter with the current situation.
The age pension will go the way of the dinosaurs before I’m eligible for it, I’m fairly certain. I’ll just have to work until I die.

I’m confused by some of the advice regarding moving Super to different investment options, and would love some non-biassed information. Watching the market fall dramatically last week, we moved some/all of our Super balances from a ‘balanced’ growth option to a ‘stable’ option (with a lower proportion invested in shares and equities) to try to mitigate against the heavy losses. I should add that we plan to retire in ~ 4 years. I monitor the market daily, and our plan is to move back to a balanced growth option (our funds allow us to do this unlimited times) once things settle a little.
My question is this: why am I told that this strategy risks missing out on any rebound that occurs? It feels that funds don’t want members to reduce my investment in the market because this will affect their buying power. Providing one monitors the market regularly, and is ready and able to switch back, why is this not a sound strategy?

Focusing solely on that question what will often happen is:

1> the balanced investment loses significant value - money evaporates
2> what remains is moved into a more conservative mode
3> the market rebounds (eventually)
4> the conservative mode investment does not increase in value as quickly as the original balanced one.

So an analogy is, keyed to my above numbers:
1> $100,000 drops to $60,000
2> $60,000 is moved into a more conservative fund
3> market start rising
4> conservative fund might rise to $75,000 in a year BUT the original balanced fund might recover to $85,000.

So after the year the $100,000 investment left alone would be $85,000 but the change (at the bottom) would have only delivered $75,000 as it would have missed the exuberance of any recovery.

A more exuberant recovery would make the disparity greater, as would a longer term outlook.

Timing the market is usually a losing proposition. The more one does the above the larger the potential financial hit at the end of the day. If one times everything perfectly, and many ‘advisors’ promote market timing, they would do Very Well - why are those advisors not doing it themselves; they are taking sure money for advice rather than risking their own on market timing (for the most part).

One more thing is that you lose the spread between buy and sell every time you switch, so it is not ‘free’ to do so, at least in those funds I am familiar with. It can be a few percent each time in some of them.

Does that help?

edit: Also see the related topic

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Thank you BBG, that is nice and clear!
Having read that, I now think the risk mitigation of this strategy depends partly on when the switch to a conservative option is made. If made early enough, before the major falls have been happening too long, then by protecting the capital from further drastic losses, you’re in a better position than someone who waited longer to protect their capital and took a bigger hit before changing (and hence the advice not to). Rather than trying to time the market, we plan to switch back to growth early (when the market seems to have stopped falling).
I feel that it’s a pretty fine balance between protection and growth, and while likely to mean some fall in value, hopefully this will be less than if I did nothing… Time will tell. The global economic impact of the virus will be huge, on personal, small and global business levels…

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An article with some advice regarding what to do with one’s super.

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Good luck with your strategy. ‘Timing’ when the market seems to have stopped falling, or timing when you feel the market is on the way back up?

For those approaching retirement most super funds recommend a low risk asset mix. The preference is to carry a large proportion in bonds and cash related investments, to avoid sudden shocks.

Perhaps your super fund manager or investment advice has not been as good as it needed to be?

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I agree and feel the same.

As I posted elsewhere and only in relation to super, the fall in equity prices and other investments will have the most impact on those who are about to retire or need to sell shares to fund a major purchase in retirement.

Those who are about to retire hopefully have restructured their investment portfolio to reduce exposure to higher risk investments such as shares. If this has been done in a pragmatic way, the impact should be modest,

For those who need to sell shares for a major purchase (car, holiday etc), the prudent thing to do would be to think if the purchase is essential at this point of time and whether it can be deferred until such time that the impacts of COV-19 are less.

Those who are a way of retirement, time will be the saviour. Historically investments go up and down…but in the long term average up. If one has time one can wait until things recover through the next up cycle.

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No, no, happy with advice during a planning session last year when we asked about moving from a growth option (and not the highest one…) towards a more conservative option, and decided to move from the default growth to a ‘balanced’ option which is a little more conservative. Watching the drastic falls in the market (and our Super balances) we felt it better to move to more conservative again. Happy with the advice and risk category we ‘fit’ into, and well aware of the risks, just feel that we needed to do something to protect our hard-gained Super and retirement plans. I still feel we made the correct decision, we will undoubtably have a lower balance come retirement day than without the impact of the virus, but with no action feel we would have even less when things stabilise.

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Noting that probably noone here is legally allowed to give you financial advice … so this isn’t financial advice.

That’s OK providing that you did it early. If you do that too late then you are locking in your losses.

Retiring in 4 years suggests that an option towards the more conservative end of the spectrum would be good for you anyway.

Because the market doesn’t simply move down uniformly from its February peak, riding down on the slippery slope of COVID, and then, suddenly when COVID is declared officially all over by the government, move up uniformly from its bottom this year sometime up to a suitable level of recovery.

You can watch the market every day or every hour or every week but you can’t predict, except after the fact, when the bottom was. There can be false recoveries that end up being new lows (so called ‘dead cat bounce’) etc.

If you actually can pick the bottom then you can be rich beyond your wildest dreams and you will never need to draw on your super. :slight_smile:

The market has a saying about those who think they can pick the bottom but, as this is a G rated forum, I won’t repeat it here.

That’s probably true. It does cause problems for them. In many managed funds they can simply refuse to let you liquidate (for example in unprecedented times like these), although I don’t know whether that applies to super.

If they let you do it, you should do what you think is right for you.

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Thank you Person, for the ‘non-advice’! I really appreciate your points and thanks to all the replies here feel I have a much better understanding of why the advice is not to change options.
We did change fairly early (but wish it was a couple of days sooner) and were already in a ‘balanced’ growth option, being mindful of the risk levels of shares-based investments and wanting a slightly more conservative mix as we approach retirement.
We certainly don’t want to liquidate our Super balances, but plan to switch investment options again when the market seems to have settled - and I absolutely take the point that it’s impossible to know until after the fact that this has happened…
Having said all that, and I’m trying not to be wilfully ignorant, I still feel that in changing our investment mix early, ensuring less exposure to the falling share values, our balances will be a bit more protected than if we did nothing. The trend will turn around at some point in the future, as it always does, and there will be time for our balances to grow again whenever we switch back to a less conservative growth option (though not comfortable with the highest risk options) over the duration of our retirement. Although our balance will always be less than if Covid-19 never happened, it shouldn’t affect our modest retirement plans too much, we are very lucky in this regard. Many will fare much worse.

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I’m puzzled with the general advice/suggestion that if you are about to retire, then transfer your super to a more balanced, lower risk, investment. Say I’m lucky enough to retire at 60. Then my super might have to last me up to 30 years. For an investment of around 10 years or longer one is recommended to use a high return/high risk option. It sounds conflicting to me.

The value of a super account is sensitive to the share market. In retirement one usually wants dollars available in a consistent manner with a balance left after each withdrawal. Think capital preservation is job 1 when ‘it’ hits the fan (as it just did).

Most super accounts (balanced and slightly aggressive) have lost 20-30% of their value in the past 2 weeks. Has it reached the bottom yet? TBD. It may be years or even decades before accounts recover to their pre-crash valuations.

If you have an aggressive fund you might have lost 40-50% of the value almost overnight. Consider a long term rate of return of say 10% p.a. versus 5% pa for a more conservative fund - after the losses.

If I loose 20% and get 5% pa. back, compare that to losing 40% and getting 10% p.a. back.

eg for a balanced or slightly conservative fund,
$500,000 -> $400,000 post crash
$20,000 pa added during the recovery (simplistically 5 years to recoup)

for the aggressive fund,
$500,000 -> $300,000 post crash
$30,000 pa added during the recovery (simplistically 6.7 years to recoup)

/edit: obviously if all of the 'growth, 5% or 10% respectively in the above example, was drawn as a pension you would be ahead by $10,000 pa with the aggressive fund UNTIL the next crash or just a bad year. Since one wants it to last the rest of a lifetime it becomes a gamble how many bad years you can endure, and how the bad years coincide with your withdrawals or a lump sum if needed./

BUT you need funds in the interim so you would be withdrawing from the base of $400,000 or $300,000 respectively, elongating the time. If you needed a large sum today it would be taken from the lowest or close to the lowest amount available, leaving even less.

Does that explain it sufficiently?

OTOH, if you do not need the money, have other retirement income to cover all your expenses and wants, and are not withdrawing super, higher risk longer term investing might make sense with the long term horizon. However ‘our’ ages come into the equation. Is it a savings account or to fund retirement? How much of the account might be passed on to another?

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Yes, that helps. Thanks.

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Fair point. I think the main difference is that money will be starting to flood out of your super. The rules seem to change all the time but it could depend on whether you are still making partial deposits (transition to retirement) and on your total balance and also on what percentage you are taking out. There is a minimum that you must take out of your super each year (once in the pension / annuity phase), so 30 years may be a bit unlikely.

On account of COVID-19, the government has just reduced the minimum you must take out (presumably a temporary change).

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Thanks everyone, keep the questions coming!

Here’s our latest article on super and COVID-19: COVID-19 and your super: what should retirees do?

Stay tuned for more articles!

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Hello @ebarz
I would like to know if is it now a good time to change Superannuation fund?