Investing in volatile times

In recent months, media headlines have screamed, ‘Worst year for super since crash’ or ‘Brace for bad super returns’, and have reported super as being a poorly performing investment.

This ignores the fact that superannuation is a tax efficient structure not an investment. Even when markets perform poorly, cash and growth assets should provide better returns in superannuation than outside.

Despite this, there is commotion among investors, particularly pre-retirees concerned their retirement savings are being eroded, and the media is fuelling this anxiety. With baby boomers approaching retirement, many are questioning the adequacy of their savings and the merits of superannuation as an investment. Would they be better off salvaging their investments by re-weighting to cash or perhaps cancelling their salary sacrifice arrangements and directing their future surplus savings to an online bank account? Is a lack of education and fear of the current conditions turning them into savers rather than investors?

As financial services professionals, we know how superannuation and investment cycles work, but the headlines are designed to rattle the ‘mums and dads’ who are less informed. Consequently, people with limited financial knowledge are liable to endanger their investments with short-term fears, especially when the headlines publicise daily movements. As Warren Buffet said, “The market is an incredibly efficient mechanism for transferring wealth from the impatient to the patient”.

During volatile market times, it’s important that as a profession we work even harder to improve Australian’s fundamental understanding of investing, particularly how the concessional tax environment of superannuation may help increase their returns even now.

With better knowledge, Australians would be able to make more informed and rational investment decisions and have better peace of mind when the going gets tough. The basics of investing are consideration of investment timeframes, appropriate mix of investments to suit a risk profile and a fundamental understanding and appreciation of long-term trends. This is true for investments within and outside of super.

However, taking advantage of the available taxation concessions in superannuation would seem crucially important, especially when returns are temporarily disappointing.

Rather than seeing super as a poor performing investment, Australians would do better to remember that it is a legal environment offering significant tax concessions, not an asset allocation decision. It is our choice to invest inside or outside of it with the appropriate mix of cash and growth assets. Getting people to understand this, when the headlines are promoting super as a poorly performing investment, is certainly a challenge.

The recent changes to superannuation have made it an even more effective tax structure. Ultimately, the earnings we should be interested in are net earnings, earnings after tax. At most, tax in the superannuation environment will be 15 per cent, and at best 0 per cent. Where less tax is withheld, there is more money left in the account to be reinvested. When comparing two identical investments, one in super and the other ordinary, the compounding effect of less tax on growth and earnings in super becomes obvious.

Superannuation has many of the same investment choices as the non-superannuation environment. However, with generally lower tax applied, the returns in super will be higher, and this is especially important during volatile times. Using the superannuation environment for many Australians is the best way to readily take advantage of tax concessions, and turbulent times should be a motivator to do so.

Investors savvy enough to use the advice of a professional financial adviser are also likely to welcome the benefits of clever taxation strategies. They will be looking closely at the tax structures and processes of platforms and managed funds. Real returns can be greatly impacted by clever tax optimisation processes and carefully managed stock turnover. Look for a platform that offers features like withholding tax annually on contributions, allowing a longer period of investment, or parcel selection, so you can reduce the assessable capital gains.

With some insight, many Australians would understand there is no better time to be carefully invested inside the superannuation environment, especially with additional tax efficient features built into their strategy. Of course, the basic principles still apply, such as diversification and dollar cost averaging, but it’s time to complement this with clever tax planning and ongoing client education and communication about the benefits of the superannuation environment.

Unfortunately, there will always be sensational investment market headlines to elicit irrational and emotive responses from investors, but as investment professionals it is our role to keep the investor’s eyes focused firmly on the horizon and the glowing superannuation sunset.

Martin Breckon is the technical marketing manager at Aviva.