While pension funds’ high exposure to equity markets caused concern in early August amid significant market volatility, AMP’s chief economist, Shane Oliver, explained that growth assets such as shares provide superior long-term returns despite their susceptibility to volatility.

In his latest market note, Oliver said recent market volatility triggered by fears of a US economic slowdown, a surprise decision by the Bank of Japan to raise interest rates and the cancellation of yen trading should not dampen the outlook for long-term investments. like super.

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

“Two weeks ago, there were many similar headlines after equity markets fell sharply in response to fears of a US recession. But such headlines are nothing new. After such falls, the usual questions are: What caused the fall? What is the outlook? And what does that mean for retirement?

"The correct answer to the latter should be something like, 'Nothing really, as super is a long-term investment and share market volatility is normal.'

“But it may seem like a marketing ploy. However, the reality is that – except for those involved in trading – shares and superannuation are really long-term investments.”

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

"This approach seeks to take advantage of the power of compound interest," he said, highlighting AMP's modeling which assumed that a typical $100 investment in Australian shares in 1926. would have witnessed growth of 11.2% year to date.

By comparison, a similar bond investment would return 6.5% per annum, while Australian cash would return 5.2% over the same time period.

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

"So it makes sense to have decent exposure to them."

He added: "The higher returns from stocks and other growth assets reflect compensation for their greater risk, seen in volatility and illiquidity, compared to cash and bonds."

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 difficult given the bombardment of financial news these days, it makes sense to look less at your returns because then you're more likely to receive positive news and less likely to make rash decisions or adopt an investment strategy that is too cautious.”

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

But funds quickly continued to demonstrate a sustained recovery, it added.

"Members should also take solace in the fact that most have invested their super money in well-diversified portfolios with investment exposure spread across a wide range of asset classes," said Mano Mohankumar, senior manager of investment research at Chant West.

"This helps ensure a smoother return trip by cushioning the blow during periods of equity market volatility while capturing a significant portion 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 spot short-term market movements, which he sees as a difficult task.

"In hindsight, many market fluctuations such as the tech boom and bust, the GFC and the crash and the stock recovery around the COVID pandemic seem inevitable and therefore predictable, and so it's natural to think 'why not try?' by switching between cash and shares within your super to anticipate market movements. Fair enough, he said.

"But without a tried and tested market timing process, it's hard to try to time the market."

He highlighted modeling which found that individuals fully invested in Australian shares from January 1995 would have seen a return of 9.5 per cent per annum. This contrasts with 12.2% for people who tried to time the market and avoided the worst 10 days.

"If you avoided the worst 40 days, that would have been increased to 17 percent annually," Oliver said.

"But it's really hard and many investors only get out after the bad returns hit, just in time to miss out on some of the best days." For example, if you try to time the market, miss the 10 best days, returns drop to 7.5 percent per year. If you skip the top 40 days, it drops to just 3.5 percent annually.

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