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Share markets and super: Should you switch investments when markets fall?

During a market downturn, you might be tempted to switch your super away from riskier investments, like shares, and into safer ones. But is it better to switch or stay put?

When it comes to investing and super, everyone has a different comfort level in terms of how much risk you’re willing to accept. It depends on your financial situation, goals, stage of life, and even your personality.

That’s why, when markets fall, everyone reacts differently. While some are quick to get out of the share market, others are content to ride out short-term fluctuations because they’re confident that markets will recover over the long term.

If short-term movements in your super balance are making you nervous, and you’re wondering whether you should switch into less-risky investments, there are a few things you should consider before you do anything. 

Why switching isn’t always a good idea

Between February and March 2020, at the start of the Coronavirus pandemic, there was a significant market downturn. With so much uncertainty around, some people were worried about what the pandemic would do to their super balance, so they switched away from shares and into less-risky investments. 

Research revealed that the amount of people switching investments was three times higher than usual. But when the markets picked up again, the risk was that these people missed out on the recovery. Over 70% of the switches done between March and April 2020 produced negative outcomes. These people would have been better off if they had stayed with their initial investments and done nothing.1

While that won’t always be the outcome, it’s an important reminder that markets can recover as quickly as they fall. That’s why any changes to your super strategy should be part of a long-term plan rather than a short-term reaction. Switching can be costly if you don’t do it for the right reasons.

What happens when you switch investments

Let’s say you switch your super by moving away from a Growth portfolio, which has a high allocation to Australian and international shares, and into a Conservative portfolio, which has a high allocation to cash and fixed interest. 

When you sell out of an investment while its value is down, you lock in its current price, which makes your losses real and irreversible. But if you stay invested, its value could increase again without you having to do anything.

The importance of diversification

A diverse investment portfolio spreads your risk exposure across different asset classes and markets, rather than putting all your eggs in one basket. This means if one asset class declines in value, other asset classes may experience higher returns and act as a financial buffer.

For example, if your super is invested across several asset classes – like Australian and international equities, fixed interest, bonds and cash – it’s likely to withstand a market downturn better than if you only invested in one of these types of asset classes. That’s why diversification is an important part of any long-term investment strategy.

If you’re tempted to switch investments or change your investment strategy, chat to a financial adviser first. They can help you work out if it’s the right move for you at the right time.

We’re here to help

If you’d like to talk to someone about your financial goals, you can use our online tool to connect with a financial adviser near you.

The Colonial First State Investments team is working hard to make sure you have the support you need. We will continue to monitor markets, share regular market updates, and communicate closely with our network of experienced investment managers.

As you keep your long-term goals top of mind, remember: our team is here to help – with news, insights and helpful resources available on our website to help keep you up-to-date.

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (CBA). Global Markets Research has given CFSIL its permission to reproduce its information, opinions, and commentary contained in this document and for CFSIL to authorise third parties to reproduce this document. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of CFSIL at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to acquire, hold, vary, or dispose of any financial products. CFSIL is a wholly owned subsidiary of CBA. CFSIL is the issuer of super, pension and investment products. CBA and its subsidiaries do not guarantee the performance of CFSIL products or the repayment of capital for investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without CFSIL’s express written consent.