Be guided by attitude to risk
QI am 61. My super is currently in a high-risk category, so should I switch it to a lower-risk category because of the pandemic? My balance has already dropped from $170,000 to $158,000.
The perfect outcome, Karen, would be to have switched before the pandemic and then switched back in March when the market hit quite dramatic lows. Hindsight is a wonderful thing!
The truth, of course, is that as usual none of us had the first clue about the pandemic we find ourselves in. The question is what you do now. My crystal ball has been flawed for decades, but we can apply some longstanding logic.
Over the long term, a high-risk fund should outperform a balanced fund, which should outperform a conservative fund. The most conservative asset of all, cash, is historically the worst-performing asset over time.
But we also need to add to this mix our attitude towards risk. I believe our age is an important factor. This is very personal, but we held high-growth super until we were in our late 50s. At this stage we moved to balanced. Some of our similarly aged friends moved to conservative; others held onto higher-risk funds.
Given we all hope to live for a couple of decades more, historically this is plenty of time for risk and return to play out, with higher-risk funds likely to produce better returns. So this is a matter of our own attitude to risk. A simple way to assess this is the “sleep at night” test. We don’t mind missing out on high returns, but don’t want our super falling dramatically in tough times. So balanced works for us. We get some of the upside in good years and less of the downside in bad years.
My suggestion to you is to think about your time frame for investment and your attitude to risk, and not about our current situation. Statistically you are likely to see at least a couple of decades, meaning a higher-risk fund is likely to do well in your lifetime, though it will be more volatile. I believe a decision to change your strategy should be based on your attitude to risk and how you sleep at night.