Stock market volatility - what can you do in a volatile market?
Timing the market is almost impossible, especially when it comes to your super. Short term volatility in markets shows the importance of staying invested and focusing on long-term returns.
What is ‘timing the market’?
When someone is trying to time the market, they move money in and out of financial assets (like stocks, bonds, or currencies) based on their prediction of how the price of those assets will change in the future.
For example, someone could sell a stock, because they believe that the value of that stock will go down more than the value of cash in the future. The aim is to predict when prices will go up or down to buy and sell accordingly, making profits or reducing losses.
What is market volatility?
Market volatility describes the ups and downs in the prices of stocks in the stock market. The greater the stock market variations in a period, the more volatile the market is considered to be1.
More frequent and unpredictable ups and downs in a market brings more uncertainty – and often a higher risk of low or negative returns.
As super is mostly invested in stocks and other assets that are affected by market movements, your super returns will reflect this.
How is stock market volatility measured?
Volatility is usually determined by measuring the deviation of recent returns from the average return.
A common tool that investors use to measure the expected volatility of markets is the Cboe Volatility Index (VIX). This is used as a benchmark for expected volatility in 500 of the largest companies on the US stock exchange for the next 30 days.
The chart below shows heightened volatility in FY2021-22 (highlighted).
CBOE Volatility Index (VIX) January 2021 to June 2022
What is causing higher volatility now?
Political and economic factors can affect the value of stocks, as well as investors’ opinions about the market.
Over the last few months, some of the major themes affecting markets have included soaring inflation, rising interest rates, central bank policy changes, the war in Ukraine, and of course, the impacts of COVID-192.
What can I do during market volatility?
When markets are volatile, it’s very important to remember that superannuation is for the long-term. Some people try to move their investments from stocks into cash when they think stock markets are at a high, then try to re-invest when they think the markets hit a low. This is called timing the market.
Many withdraw from shares after the first drop in the market, making the first loss. Some then remain a more stable asset like cash for an extended period until they’re comfortable reinvesting in shares, usually after the market starts to recover.
This approach means that the investor gets the first loss and misses the first recovery – a double hit to the overall return. Staying invested gets the full benefit of the recovery when it comes.
Should I switch to cash when the market is down?
“The biggest mistake investors make when stocks fall is to cease being an investor and sell to cash”, according to Forbes.
Selling to cash at a certain time is also a form of market timing, the impossibility of which is shown in various studies by trusted sources such as the Financial Analyst Journal and Journal of Financial Research5.
When it comes to your super, there are also additional factors that should make you think twice about timing the market. For example, processing super investments switches takes time, so a switch may not actually happen until a few days later.
Should I switch investment options because of market volatility?
Prime Super has a team of expert investment specialists and advisors who actively take market movements into consideration. We review and adjust our investment strategy based on these movements, which has a proven track record over the long-term.
Remember, processing switches also takes time so it’s not possible to time the market by doing so.
What should I focus on when it comes to investing in super?
Short-term market fluctuations usually smooth out over the long-term*, which makes focusing on long term returns important.
Staying invested proved to be a solid strategy through the market crash that happened at the start of COVID-19. After declining markets from February to March 2020, returns in super were close to 0% across the board for the 2020 financial year.
Those who switched to and remained in conservative assets, like cash, after the start of the COVID-19 market crash missed some of the large market recovery that followed – with a return of over 17% for the market as a whole in the first half of the 2022 financial year.
What if I’m about to retire?
If you’re worried about retiring when markets are down, you could consider staying invested. You don’t have to take your super out as a lump sum, and you can receive regular payments as you choose.
A Transition to Retirement plan or Retirement Income Stream could be something you choose to consider as part of your retirement journey. These let you continue investing, and will usually smooth out short-term market fluctuations over the long-term*.
With these options, you can stay invested while you use your super to reduce your working hours or enjoy retirement and make use of tax benefits in super.
Can I talk to someone about my super?
We have a team of friendly super specialists who can help you with all things super.
You can book a chat online at a time that suits you.
* Past performance is not a reliable indicator of future performance