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Australians will receive their annual Super statements soon and the news is not good. After getting used to years of extremely positive results they have now faced two consecutive years of negative returns.

So what’s caused this bad run and what can we expect in the next couple of years? If you’ve read a newspaper or watched the news in the last couple of years, you’ll certainly know that we’re in the middle of a global financial crisis (GFC) – the most volatile set of investment conditions since the 1987 stock market crash.

The original cause of the GFC – the US subprime crisis – occurred when US banks offered loans to people who could not afford to repay them. When these people defaulted on their repayment, the banks were forced to sell the properties - in many cases for a loss.

The crisis was further exacerbated when it came to light that a large percentage of these bad loans were packaged up and on-sold as “structured” or “securitised” lending products to other investment companies. It’s these products that led to large American investment banks like Merrill Lynch and Citibank writing off tens of billions of dollars..

All around the world, governments have moved to limit the impact of the financial crisis. Many, including Australia introduced a range of measures such as aggressively cutting official interest rates and guaranteeing bank deposits to support vulnerable banks and financial institutions. There have also been large government stimulus packages handed out by many leading countries including Australia, the US, UK, China, Japan and Germany.

What about Australia?

Many economists predicted that although Australia would not be immune from the effects of the GFC, our strong banking system and our strong links to emerging economies such as China and India would shield us from the worst of the impact.

Although we’ve managed to stave off an official recession, it has not been plain sailing.

The Australian All Ordinaries index fell 15.5% in 2007-08 and 25% in 2008-09. Unemployment increased from a low of 4.8% in August 2006 to 5.8% in July 2009. The Reserve Bank of Australia (RBA) has also cut the official interest rate by 4 basis points between September 2008 and April 2009. It has remained at 3% for the last four months, the lowest it has been for almost 50 years.

The road to recovery

Many economists now agree that while the global recession is far from over, we should reach the bottom by the end of the year. From there, things should start to turn around, albeit very slowly – US economist Professor Nouriel Roubini, who predicted the global financial crisis as early as 2006, is only forecasting global growth of 1% over the next two years.

However Roubini is optimistic that the Australian economy will largely continue to defy the global gloom, growing by 2% in 2009-10 on the proviso that China’s stockpiling of commodities continues.

We are starting to see some signs that this may be the case. Although global stock markets fell 0.2% in June 2009, they also posted their first quarterly gain (16.3%) since September 2007. Closer to home, Australian share prices rose 10% for the June quarter and the Australian dollar reached a 10 month high in August climbing above $US0.84 cents.

The RBA has also signalled some degree of confidence that Australia is on the way back, deciding at its August meeting to leave the cash rate unchanged at 3% – the fourth month in a row that it has done so. Many experts are now predicting that interest rates will start to rise mid next year.

What does this mean for super investments?

The global financial crisis has not been kind to super returns. Losses experienced in the financial year ending 30 June 2008 were the first indications of  the impact of the global financial crisis on listed markets.

The losses we are seeing in 2008-09 can be attributed to the full impact of the economic crisis across the broad spectrum of investment markets and the further downward revaluations of both listed and unlisted market assets.

However, despite this negativity, we need to remember that super is a long-term investment and these short-term losses, no matter how severe, can and will be recovered over the longer-term.

Don’t panic!

History shows that those that stay invested recover all that was lost during the period of the downturn. Those that panic and get out of the game early, end up with none of the recovery.

Most Australians generally can’t access their super savings until they are 55 so it’s important to stay focused on long-term results. According to SelectingSuper, for the year to 30 June 2009 the annual returns for the default option (in which most people are invested) are:

• 3.7% over 5 years
• 5.1% over 7 years
• 5.3% over 10 years

What if I’m close to retirement?

Negative returns are not what you want to see if you’re close to retiring. If you’re contemplating retiring soon, cashing in your super benefit now may not be the best thing to do. Other alternatives, such as converting your benefit into an Allocated pension might be a better option.

If you opt for an Allocated pension, your money will remain fully invested and will benefit from future recoveries in the share market. You should seek independent financial advice to see which option best suits your individual circumstances.

Review your investment choice

If negative super returns keep you up at night, you might find it worthwhile reviewing where your super is invested. Spreading your investments across all investment classes may help reduce volatility.

It’s also a good idea to invest in a sound financial plan. A financial adviser will be able to help assist you to assess your tolerance to risk, identify a mix of assets to match your individual goals and prepare a financial strategy which is suitable for you.

Prime Super is a not for profit industry superannuation fund. This article contains general information only and does not take account of your personal circumstances. You should obtain personal advice where appropriate. Prime Super is issued by Farm Plan Pty Limited (ABN 81 067 241 016, AFSL 219723). A Product Disclosure Statement is available from the issuer by phoning 1800 675 839.