Good opportunity to rebalance super portfolios

Data released this week provides welcome news for super fund members. After five long and worrying years, balanced and growth super funds have recovered all the losses suffered during the global financial crisis and investors are ahead again.

Buoyant world share markets in 2012 have allowed funds with high exposure to shares to report returns ranging from 10 per cent to 17 per cent in 2012. Not all investors have participated in the recovery because during and after the crisis many investors opted to increase their cash and fixed interest holdings and reduced their exposure to shares.

Whether the strong performance in 2012 is repeated this year will very much depend upon the ability of our largest companies to maintain their dividends. The general consensus in the superannuation industry is that the worst is over and better times are ahead.

An interesting statistic was released this week that over a 10-year period, the compound rate of return on balanced super funds averaged between 6 and 7 per cent a year. This was made up of two distinct periods.

Before the crisis, high average annual returns in the range of 10 per cent were the order of the day. The advent of the crisis then brought negative and low returns before the strong recovery in 2012. A clear message from this volatility in returns is that higher risk investments involve a longer term horizon if the investor is not to be caught out by periods of losses. This is especially the situation for funds paying pensions or where members expect to make large lump sum withdrawals, for example to clear debts on retirement.

Being fully invested at all times in higher risk assets can prove to be very costly when money is withdrawn at the time when earnings are low. This is why advisers recommend that older people ensure that they have sufficient liquid assets to fund pension payments and cash needs for a period longer than three years.

While the Australian share market still has a long way to go to reach its previous high, the past three years has allowed investors to recoup a large part of the financial crisis losses. This applies to quality dividend-paying larger companies which are the main focus of the current recovery.

Investing super money to obtain higher returns through capital growth is a luxury that funds in pension phase cannot afford because of the inability to cover losses by boosting future contributions. Having sufficient income and cash reserves to pay annual pensions avoids any pressure to sell assets when markets are low or struggling. 

Fortunately, if present market strength continues, this year could provide a good opportunity to rebalance portfolios in situations where the risk profile is higher than the investor can comfortably afford.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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