Why you shouldn't panic about your super losing value

As global markets reel from Donald Trump's trade threats, geopolitical tensions, and US recession fears, uncertainty is gripping investors.

Market heavyweights Tesla and Nvidia have stumbled through historic declines, while the S&P 500 at one point shed US$5 trillion from its peak. The fallout hit the ASX, which slumped to a seven-month low, wiping A$45 billion from the Australian market.

With both indices in correction territory, which occurs when a market goes through a 10% fall, some nearing retirement may be tempted to switch their superannuation to cash to escape the volatility.

But is that the right move?

Mano Mohankumar, investment research manager at superannuation research consultancy Chant West, says perspective is crucial in times of volatility.

"The person on the street will see those headlines - X-billion dollars wiped off the stock market," Mohankumar says. "But in a typical default fund that most super members are invested in, that world is diversified. So, the headlines don't necessarily reflect what they've lost."

According to Mohankumar, growth funds typically rose by around 20% last two calendar years.

Chant West data showed that after a strong January, super funds experienced a small pull-back in February with the median growth fund (61 to 80% in growth assets) down 0.9%, as volatility crept back into share markets.

"A wide view is everything. There are many ups and downs along the way in your superannuation journey."

Nothing is lost until its locked in

Watching your super balance drop by double digits is unnerving, but unless you cash out, those losses are only on paper. This was a painful lesson for many Australians who switched their super to cash during the market lows of the COVID-19 pandemic.

It was a time of fear - an airborne virus with no cure forced the world into lockdowns, Australians panic-hoarded toilet paper, and investors reacted violently. Nearly a third of the stock market was wiped out in two months.

For many older Australians - who had the least time to recover from losses and were at the greatest health risk - the impulse was to move to the 'safety' of cash.

"That's not rational - although it might've seemed rational for them at the time," says Damien Hennessy, asset allocation specialist at Zenith Investment Partners.

But then came the turnaround. Vaccines were introduced and lockdowns eased.

"Markets bounced back incredibly sharply," Mohankumar says. "But by December, a quarter of the people who had switched to cash were still in cash - because there was no clear signal to move back."

By staying on the sidelines, they had locked in their losses. As markets recovered, those who had panicked and pulled out missed the upswing, effectively cementing a 20-30% drop in their retirement savings.

Market corrections are normal

While the scales of fear and greed may be tipping towards the former right now, investors shouldn't wish away market volatility, according to Jonathan Philpot, a financial planner and partner at HLB Mann Judd.

"These ups and downs are a normal part of markets. In fact, a decline of 10% or more tends to occur within share markets every 18 months to 24 months," Philpot says. "This is simply the market volatility that investors need to accept when they invest in shares."

But for many investors, fear isn't just dominant, it's hardwired. Heuristic tendencies, such as the behavioural bias towards loss aversion which suggests the pain of loss is felt more than the pleasure of gains, can cloud even the most rational decision-maker.

From an asset allocator's point of view, Hennessy says that he understands that these things happen.

"We've had 16-17 corrections in the last 20 years, or probably more actually. So, you just have to be prepared for it and understand what you can cope with," he says.

"Now that's hard to ask a person ahead of time, at what point are you going to feel nervous? When you're 5% down for a young investor is probably not much, but it is a lot for a 65-year-old investor."

Mohankumar agrees, saying everyone has a different threshold on what makes them uncomfortable and fearful. Still the principle remains to remain stoic and rational when the world and your retirement is seemingly evaporating. Of course, that's easier said than done.

"That's why we'd always encourage investors to see a financial planner who can look at the overall financial position, including assets outside of super."

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