Shares success a waiting game
RESEARCH from index fund manager Vanguard shows that COVID-19 has seen selfmanaged superannuation funds (SMSFs) switch out of shares and into low-risk investments.
SMSFs account for onequarter of the nation’s super savings. However, following the extreme market uncertainty we saw earlier in 2020, more than one in two SMSFs made substantial changes to their asset allocation.
According to Vanguard, 55 per cent of SMSF trustees increased their fund’s exposure to cash and property, driven mainly by a negative outlook on both Australian and international shares. As a result, direct shares now comprise just 31 per cent of the average SMSF portfolio.
That’s far lower than the 60-70 per cent exposure to shares that you’d typically see in the balanced portfolios of professionally managed funds. And it could mean earning lower long-term returns.
There is no getting around the fact that Aussie shares plunged 32 per cent between February and March. Despite the subsequent upswing in values, it will take years for this downturn to wash through the “average” annual returns on equities.
It’s also true that a number of listed companies have shelved plans to pay a dividend this year.
This can affect current retirees, especially those who’ve based their SMSF portfolio around shares that deliver regular dividends.
Despite all this, I’m not convinced that a radical shift in your SMSF investments is the answer. As many SMSF trustees will have discovered, returns on cash are woeful, and in many cases barely match inflation.
Sharemarkets, on the other hand, have recovered a good chunk of their value. Over the last quarter (to the end of August), Australian shares staged a 3.7 per cent comeback. That’s on top of the rapid bounce we saw in equity markets between late March and April.
It all demonstrates the merits of allowing growth assets to regain ground after a downturn, rather than selling out. It can take discipline but, as we’ve seen in the past, markets never fail to stage a recovery, from even significant downswings.
What’s interesting about the Vanguard study is that SMSFs are already keen to head back into shares. More than one in three (37 per cent) trustees are willing to increase their allocation to Australian shares, and 23 per cent are looking to increase their investment in international shares.
Plenty of these SMSFs could end up paying more to buy back into the market than the price they sold their shares for. And that’s not my idea of investing.
When it comes to longterm investing, staying with your original plans can deliver rewards.
Markets always go through ups and downs, and, yes, COVID-19 puts us in uncharted waters, but history has consistently shown that it’s time in the market – not market timing – that delivers good long-term returns.