Volatility on share markets can be a reminder to make sure you are in the right super fund investment option. Photo: Peter BraigStrap yourself in, 2017 is set to be “volatile” in financial markets. That’s the view of many fund managers and other investment experts, and you can see why it seems a pretty safe prediction.
With Donald Trump in the White House, market-moving comments are just a presidential tweet away. A host of European nations also hold elections this year, which could open the door to more anti-establishment leaders, adding to the many unknowns in the world economy.
It’s easy to get the impression of a more turbulent world – which is reinforced by a 24-hour media cycle that naturally emphasises the more dramatic events.
But what’s the hard evidence that the financial world is more volatile than it used to be?
And if markets are becoming even more or a roller coaster, how does this affect your superannuation?
For all the talk about volatility, it is certainly not reflected in what market insiders call the “fear index”.
The VIX, or volatility index, is traded on the Chicago Board Options Exchange, and viewed as a global benchmark for volatility, because it shows the price investors pay to insure against wild market swings. Yet last week, the VIX fell to the lowest level in its 27-year history.
The VIX did spike when Trump was elected, but remained well below the recent 2015 highs reached when China’s sharemarket was tumbling, and even those highs were a fraction of the genuinely scary peaks of the global financial crisis in 2008-09.
The low level of the VIX suggests the recent market swings are more a case of share prices bouncing around, rather than investors being deeply uncertain or worried.
However, it is also true that investment returns for super funds have been getting bumpier.
SuperRatings has measured the rolling volatility over one and three years for balanced funds – where most of us have our super.
They did this by measuring the funds’ percentage change in returns, compared with its longer-term average. The message is that things did indeed get more volatile in 2015-16 financial year, after five or so years of greater consistency. Yet returns have still been positive, averaging 9.5 per cent a year over the past five years.
Yet it’s important not to overstate the significance of volatility for superannuation, the ultimate long-term investment.
SuperRatings chairman Jeff Bresnahan says market volatility itself is not necessarily a problem for super fund members – the more important issue is making sure you are in the appropriate investment option for your situation.
“If there is market volatility this year, which you would expect, the important thing for ns is that they are in the right investment option, and that’s the thing a lot of us don’t look at,” he says.
The basic rule here is that younger people, such as those in their 20s, can withstand greater volatility in their super fund because these short-term changes should be outweighed by longer-term gains.
“A 25-year-old with money in super can be 100 per cent in shares that bounce around like crazy for 12 months and it should not bother them,” Bresnahan says.
As you get closer to retirement, however, volatility can make a meaningful difference to the size of a nest egg you’re left with. The problem is that most people don’t think about whether they are in the most appropriate option, because most of us are not especially interested or motivated in checking out such things.
So while volatility might not be as scary as it can look on the news, it’s probably a useful prompt for people to ensure they are taking the right amount of risk with their savings.