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While pension funds’ high exposure to equity markets sparked concern in early August amid significant market volatility, AMP Chief Economist Shane Oliver explained that growth assets such as equities offer superior long-term returns, despite their susceptibility to volatility.

In the latest market note, Oliver said recent market volatility, fueled by fears of a US economic slowdown, a surprise decision by the Bank of Japan to raise interest rates and a trade recovery in the yen should not hinder long-term prospects. investments like super.

Instead, he said, headlines like “Australian market loses $100 billion in bloodbath” should be viewed with caution.

“Two weeks ago, there were a lot of headlines like this after equity markets fell sharply in response to fears of a US recession. But such headlines are nothing new. After such falls, common questions are: What caused the fall? What is the perspective? And what does it mean for retirement?

“The correct answer to the latter should be something like: ‘Nothing, as super is a long-term investment and market volatility is normal.’

“But that may seem like a marketing twist. However, the reality is that, except for those who trade, stocks and retirement are really long-term investments.”

Oliver explained that while typical super funds have a bias towards equities and other growth assets, they hold some exposure to defensive assets such as bonds and cash to avoid excessive short-term volatility.

“This approach tries to take advantage of the power of compound interest,” he said, pointing to AMP modeling which suggests a typical $100 investment in Australian shares in 1926 would see 11.2 per cent growth year to date.

In comparison, a similar bond investment would have returned 6.5% a year, while Australian cash would have returned 5.2% over the same time period.

“Because shares and property offer higher returns over long periods, the value of an investment in them grows to a much larger amount over time,” Oliver said.

“So it makes sense to get decent exposure to them.”

He added: “The higher return on stocks and other growth assets reflects the offset of their higher risk, seen in volatility and illiquidity, relative to cash and bonds.”

While acknowledging that inventors don’t have 100 years to save for retirement, Oliver said “our natural tendency is to think very short-term.”

“And that’s where the problem starts,” he said.

“Although it’s hard, given the bombardment of financial news these days, it makes sense to look less at the bottom line, because then you’re more likely to receive positive news and less likely to make rash decisions or end up adopting a overly cautious investment strategy. .”

Earlier this month, research house Chant West reported that a typical growth fund, which holds an average 55% allocation to equity markets, saw a significant decline in early August amid a market selloff.

But funds continued to move quickly to demonstrate a resilient recovery, he added.

“Members should also take comfort in the fact that most are super-invested in well-diversified portfolios that have investment exposure spread across a wide range of asset classes,” said senior investment research manager Chant West, Mano Mohankumar.

“This helps ensure a smoother return journey by cushioning the blow during periods of equity market volatility, while capturing a significant proportion of the upside when equity markets perform well.”

Equity markets shine over the long term

In his market note, AMP’s Oliver also cautioned against trying to time short-term market movements, which he considered a difficult task.

“With the benefit of hindsight, many market changes such as the tech boom and bust, the GFC and the downturn and rebound in stocks around the COVID pandemic seem inevitable and therefore predictable, so it’s only natural to think” why not try. ?’ by switching between cash and shares in your super to anticipate market movements. Fair enough, he said.

“But without a tried and tested market timing process, trying to time the market is difficult.”

He pointed to modeling which found that people fully invested in Australian shares since January 1995 would have seen returns of 9.5 per cent a year. This is in contrast to 12.2% for people who tried to time the market and avoided the worst 10 days.

“If you avoided the worst 40 days, it would have grown to 17 percent a year,” Oliver said.

“But this is very difficult and many investors only get out after the bad returns have happened, just in time to miss out on some of the best days. For example, if in trying to time the market you miss the best 10 days, the return drops to 7.5% per year. If you miss the best 40 days, it drops to just 3.5% per year.”

Ultimately, the chief economist said the best approach is to recognize that super and shares are long-term investments.