It’s natural to feel nervous when markets fall. News about inflation and rising interest rates may prompt you to make an emotional investment decision. But history tells us that markets trend upwards in the long run – and switching investment options at the wrong time can have a negative impact on your overall long-term investment return.
Take a long-term view
If you feel anxious when you see your balance drop and worry about your retirement savings, know that it’s a common reaction. And it’s natural to consider switching your super into a more defensive portfolio mix to avoid market turmoil. But doing so could mean locking in losses and missing out on the recovery which follows.
A year with a negative return can be stressful, although the general long-term trend is for markets to grow, not contract.
The Australian share market has only recorded five negative years in the three decades since compulsory superannuation was introduced in 1992.1
Here are three examples of market falls, and their following recoveries.
The COVID Crash 2020
Why did this happen?
In March 2020, the world started to realise how serious the rapid spread of COVID-19 really was. Governments enforced lockdowns, air travel was all but outlawed and investors desperately sold off their shares fearing these restrictions would hurt companies' growth plans and profit margins.
What did it mean for investors at the time?
It all came to a head on 16 March 2020, when the ASX 200 recorded its worst day ever (down 9.7%)2 while in the US, the S&P500, Dow Jones Industrial Average and NASDAQ indices all lost 12% or more.3
What was the best thing investors could do at the time?
Investors who switched to cash at the end of March, hoping to protect themselves, were 22% to 27% worse-off on average than those who held on through the drop.4 Share markets didn't just recover – they grew to new highs. And people who stayed invested benefited from that growth.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 August 2017 to 30 June 2022.
Global Financial Crisis 2007 – 2009
Why did this happen?
The mid 2000s was a prosperous period for developed countries and mortgage lending became a lucrative business for banks. With house prices rising and regulators unworried about the potential risks, banks in the US began lending increasingly large sums to borrowers. included lending to borrowers with a high risk of default. US banks packaged up and on-sold those risky loans to investors.
Then in 2007 interest rates rose and house prices fell. Homeowners found themselves unable to make the repayments on their mortgage and owed more than their homes were now worth. As people walked away from their obligations, banks quickly racked up massive losses. The investors who'd bought the risky loans also lost money. The interconnectedness of global finance meant banks around the world experienced significant losses with some collapsing.
The resulting fallout remains one of the worst economic downturns since the Great Depression of the 1930s.
What did it mean for investors at the time?
The Australian share market fell 54% – a painful, drawn-out decline over 16 months from November 2007 to March 2009. But by 2013, US markets had returned to their pre-crisis highs. Australia took a little longer to regain its losses, finally breaking back above its pre-crisis levels in 2019. This may be because Australian companies pay a greater share of their earnings as dividends to investors compared with US companies.5
What was the best thing investors could do at the time?
Staying invested during the Global Financial Crisis proved the best strategy, despite testing investor nerves. Yet anyone who switched their investments to cash locked in those original losses and missed out on the multi-year gains that followed.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 31 January 2007 to 31 December 2012.
September 11 attacks 2001
Why did this happen?
Almost 3000 lives6 were lost when four planes were deliberately crashed into strategic locations around the US on 11 September 2001. Almost all of these deaths were in New York, where al-Qaeda destroyed the World Trade Centre towers which sat at the heart of the financial district.
What did it mean for investors at the time?
In the days after the attack, markets dropped. The S&P500 fell 11%7 (extending the losses from the tech wreck earlier that year) while in Australia, the ASX200 lost 4.11% in a single session, before reaching a bottom on 24 September, 9.79% below its pre-attack level.8
What was the best thing investors could do at the time?
Both the US and Australian share markets recouped all these losses only a month later. By taking a long-term view of investing, you can ride out any short-term dips in the market and take advantage of growth opportunities over the long term.
Source: S&P Index Data Services. S&P/ASX All Ordinaries Accumulation Index. Date from 30 June 1997 to 31 May 2002.
What can we learn from history?
So, what’s the key thing to take away from these three examples? When markets fall sharply, it’s only natural to be concerned and think about moving money to less risky investment options – with a plan to switch back later.
Yet as history has shown, it is important to consider staying invested at times of market volatility to enable your investments to benefit when the market rebounds.
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If you’re concerned about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary.
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Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments.Information on this webpage is provided by AIL and CFSIL. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the target market determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36.
1 Chant West, 'Patience To Be Tested As Super Returns Head For The Red', 20 June 2022, accessed 23 June 2022.
2 G Hutchens, S Chalmers, 'ASX 200 posts biggest fall on record, Reserve Bank flags further measures amid coronavirus fears', ABC News, 16 March 2020, accessed 23 June 2022.
3 B Pisani, 'One year ago stocks dropped 12% in a single day. What investors have learned since then', CNBC, 16 March 2021, accessed 23 June 2022.
4 Lonsec, 'Accessing Advice Helps Drive Better Retirement Lifestyle', 20 August 2021, accessed 24 June 2022.
5 S Letts, 'ASX finally makes it back to its record high — why has it taken so long?', ABC News, 30 July 2019, accessed 23 July 2022.
6 P Bergen, 'September 11 attacks', Britannica, n.d, accessed 24 June 2022.
7 A.L Jackson, 'Twenty Years Ago, 9/11 Shut Down the Stock Market for Nearly a Week. Here’s What Investors Learned', Money, 10 September 2021, accessed 23 June 2022.
8 Calculated from ASX daily closing figures, 11 September 2001 to 24 October 2001.