Investors of all ages are, understandably, asking questions about how long market uncertainty will last and the effect it will have on their superannuation and investments. It’s a common reaction in times like these to consider more defensive assets such as cash.
Over the past 10 years, superannuation money allocated to cash rose from 10 per cent to 17 per cent of portfolios, according to recent Rainmaker research1.
But, while safety in numbers is a phrase that has truth in some instances, finding a different path is often more profitable in the long run according to John Owen, Senior Investment Specialist at MLC.
An emotional market
It’s no secret sharemarkets reflect the emotions of the people investing at the time. Because markets tend to lose value when investors lose confidence, shares that offer great value will often stay cheap for a period of time. However this doesn’t mean investors should despair.
"Those who are wealth accumulators and are looking to grow their savings have time on their side, so they’re in a great position to exploit the market to their advantage, which will position them better 10 or more years into the future," says John.
It’s not surprising then that investment managers like volatile markets and are viewing this period of weakness as an ideal buying opportunity.
"For investment managers, this is the time to make decisions that help grow long term wealth. One of our global share managers has recently added four new securities to its portfolio and increased their holdings in another nine securities," says John.
With some share prices still sitting where they were five years ago, John says there are some good opportunities for individual investors as well.
"Right now, for those looking to accumulate wealth, rather than withdrawing from markets and running towards cash, it could be more opportune to try to pull as many levers as you possibly can for long-term reward," says John. "You could be thinking about investing more via salary sacrifice arrangements, or investing cash you may have sitting around that might be better invested in the market."
Another good idea for investors who are actively looking to generate wealth is to think about lifestyle choices that could help reduce personal expenditure with a view to saving more and investing this into their superannuation.
"It’s always an ideal time to think about what you can do now that will benefit you later on in life," says John.
Missing the best days
Even though the environment is very challenging, the current market cycle really shouldn’t be viewed any differently to previous market cycles, according to John. Markets do rise and fall and rise again.
He says that trying to time when to move in and out of markets is hard to get right and can be very costly if you are unlucky enough to be out of the market when the strongest return days occur.
"If you invested $1,000 in the Australian sharemarket back in 1979 and left it alone for the next twenty years, your portfolio would be worth over $30,800. However, if you were moving in and out of the market and missed the ten best days of returns in that twenty year period, your investment would only be worth a little over $18,000.That’s over $12,000 less than the disciplined investor who stayed invested," says John.
"And if you were really unlucky and missed the best 50 days of returns, you would have a portfolio worth as little as $4,652. This is a great example of why we always say that it’s more important to have time in the market, than to attempt to time the market."
As such, he says it is hard to argue that investors looking to generate wealth should opt for more protected asset classes like cash.
"Most investors do need to take some risk to generate the returns that are necessary for them to achieve their long-term investment goals," says John, "And cash, sadly is not always going to get them there."