Your questions answered

Before you switch investment options, ask yourself this question, are you switching because of your own personal needs, or as a reaction to what’s happening in the market?

If the answer is the latter, switching to cash in a down market could actually end up costing you more. Why? Because while your investment option may have gone down in price (well, below what you initially paid for it) a loss only becomes a loss when you sell your investment.

So before you decide to switch, it's crucial to understand the consequences. If you sell at a loss, you’ll be moving less money than you originally had. And when the price of that particular option goes back up in value and you want to get back into it, not only will you have to pay a higher price but you’ll also have fewer units than you started with.

Perhaps the biggest reason not to switch in a down market is that you’ll miss out when the market rebounds, and history has shown us that it eventually will.

Just in case you’re still not convinced, let’s look at what can happen to the value of a $10,000 balanced portfolio over a six year timeframe when it’s owned by two different types of investors - a switcher and a stayer.

The stayer: This investor chose not to switch investment options during the entire timeframe. At the end of 2009, this investor’s balance was $15,728.

The switcher: This investor switched their investment to cash during a down market. By switching to cash, the investor missed out on the market rebound. At the end of 2009, this investor’s balance was $12,761.

That’s a difference of nearly $3,000!

In the chart above, the orange line shows the growth of a $10,000 sample 70/30 balanced portfolio from 1 January 2003 until 31 December 2009. It really shows the damage switching can have on a long term investment such as your super.

The portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns shown in accordance to the following asset allocations. 32% Aust Shares (S&P/ ASX 300 Accum Index), 25% Aust Bonds (UBS Warburg Aust Comp Bond Index), 5% Cash (UBS Warburg Bank Bill Index), 20% International Shares (MSCI World Net Div Reinvested Accumulation Index), 10% International Shares $A Hedged (MSCI World Net Div Reinvested Accumulation Index $A Hgd), 8% REITs (S&P/ASX 300 Property Accumulation Index).

While we know that markets move in cycles, no one can say what tomorrow will bring. But what we can do is look back through history and see that a down market has always been followed by periods of higher returns.

For example, on 19 October, 1987, the now infamous Black Monday, the US Dow Jones Industrial Average Index lost 22.6% in one trading session. It was even worse outside of the USA, with markets in the UK, Hong Kong and Australia all losing more than 25% by month end. Yet just two years later, the US market had recovered all of it’s losses – and went on to rise dramatically over the next ten years.

In most cases, two years is not a long time from the standpoint of a long-term investment plan. Even someone who is about to retire could still have an investment horizon of more than 25 years.

The key point is that in the history of share markets, very few events have had a meaningful impact on long term returns. Not the Asian crisis (1997/98), the tech wreck (2000) or the 9/11 terrorist attack (2001). In each of these scenarios, the S&P/ASX 300 has always bounced back within 18 months to two years.

Because super is specifically intended for your retirement, the Government has restrictions on when you can access it - usually not until you’ve permanently retired or reached your preservation age.

And while a cash account such as a term deposit for your retirement savings might seem like a good idea in theory when markets are down, your super has certain benefits that just can’t be beaten.

For example, if your super was kept in a cash account, you’d have to pay tax each financial year at your marginal tax rate on any earnings it made. But your super receives various tax concessions that help your money grow faster than it would in a non-super investment such as a bank account.

Also, cash accounts cannot offer the same growth and long-term investment returns provided by the range of investments you can access with your super. So while it is true that cash presents a lower risk, it also provides a lower return. As a result, your returns may only just stay ahead of inflation.

With this in mind, it is also important to know that super is not restricted to any particular type of investment. Super is simply a structure with special tax concessions designed to help you save more effectively for retirement, and allows you to invest in almost any type of asset, including more conservative options like cash and bonds.

There’s a cash option available to you through your super called the Russell Australian Cash Portfolio. This fund invests in a range of cash and short term fixed interest securities and is best suited to investors who want to invest in cash with an investment timeframe of at least 1 year.

Knowing whether your investment options are the most appropriate for you can be difficult, so we have designed an investor style quiz that can assist you in determining what type of investor you are and which investment options might best suit your needs and investment timeframe. The result of the quiz will provide you with a general indication of what type of investor you are and will help you to make an investment choice which reflects your investment style and risk tolerance.

Take the quiz now

Trying to pick the best-performing investment option of the moment is very risky, considering that one year’s best performer can just as easily end up as the next year’s worst performer.

For example, over the last five years, Australian real estate investment trusts have been both the top performing and worst performing asset class not once, but twice.

You can view the latest performance of investment option(s) but keep in mind your super is a long term investment, so it makes sense to focus on the longer term returns, such as 5 and 10 years, rather than quarterly performance.

While a fee doesn’t apply to investment switches the Fund may impose a transaction charge for members who switch investment options excessively.

The transaction charge is currently $119.50 plus 0.2% of the amount switched and will be indexed by AWOTE at 1 July each year.

Without the knowledge of which asset classes or sectors will perform really well, your best possible defence against market volatility is a well-diversified portfolio.

To do this, you need to spread your investment across different asset classes to reduce your dependence on the performance of a single asset class.

A typical balanced portfolio*, such as the Russell Balanced Portfolio, provides automatic diversification by generally investing in 70% growth assets (such as Australian shares, international shares and property) and 30% defensive investments (such as fixed interest and Australian cash).

*Assumptions: The diversified portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns shown in accordance to the following asset allocations. 70% Growth portfolio consists of: 32% Australian Shares, 25% Australian Bonds, 5% Cash, 20% International Shares, 10% International Shares $A Hedged, 8% REITs. Sources for the asset are: Australian shares: S&P/ASX 300 Accum Index; Australian bonds: UBS Warburg Aust Comp Bond Index. Cash: UBS Warburg Bank Bill Index. International shares: MSCI World Net Div Reinvested Accumulation Index (A$) and International shares hedged: MSCI World Net Div Reinvested Accumulation Index $A Hedged. REITs: S&P/ASX 300 Property Accumulation Index.