Volatile markets

Ask an expert Emmanuel Calligeris, Optimix Chief Investment Officer, provides some insight into what has been happening in the financial markets and some tips to assist in weathering market volatility.

Click here to read more about market volatility and your super.

What has happened?

Recent volatility in global markets has largely been triggered by the US sub-prime crisis, whereby a large number of home loans made to borrowers with poor credit histories went into default. As the number of defaults grew, the impact on world credit markets grew, meaning many companies suffered losses and others looking to borrow to invest, found it increasingly difficult and more expensive to source loans.

The volatility is reflected in lower economic growth in the US and rising global oil prices.

What does this mean for your super?

Whilst the results for some of us may be disappointing, there is no need to be alarmed. History shows that world markets consistently experience periods of sustained growth followed by sporadic periods of market downturn. For example the average super investor over the past five years has achieved a return of around 70% in total on their investment.

So whilst it’s easy to forget the past and focus on the current market, maintaining a long term view is important – as it’s for the long term that your super is invested. Time in the market rather than timing the market is key to looking after your long term super investment. Choosing when to invest, or ‘timing’ the market, is difficult to predict. History shows that investors who stick with a well-planned investment strategy for the long term tend to come out ahead.

Click here to see a graph which shows how missing the best trading days can significantly affect returns.

So what is ING’s view and what does it mean for your super?
We believe that the current uncertainty and volatility within financial markets will continue for some time. However, we remain positive about the long term prospects for investors and believe that world financial markets will recover over the mid to long term.

ING remains totally committed to professionally and actively managing and protecting our customers’ investments by remaining true to our proven investment philosophy and processes across all asset classes. Being one of Australia’s and the world’s largest investment and superannuation specialists we are using our global expertise and extensive team of investment professionals to ensure we maximise any market opportunities whilst minimising market risk for our clients.

What can you do during this period of volatility?

• Stay calm - super is a long term investment, requiring a long term strategy.
• Time - remember that investing takes time, trying to time the market is unlikely to be as successful as simply focusing on time in the market. More time in the market also helps you harness the power of compound returns.
• Diversification - spreading your investment across multiple asset classes over the long term helps to reduce risk and maximise returns. As the saying goes, ‘don’t put all your eggs in the one basket’.
• Expert advice - talk to a qualified financial adviser.
• Dollar-cost averaging – making regular contributions to super means you reduce the risk of when you buy your investments. Meet Eager Eric and Dollar-cost Danni in the case study opposite to see how it works.
• Get online - ING’s innovative Member Super Centre has webcasts, videos, articles, calculators and tutorials to help you better understand super and what’s happening with your investments.

The power of regular investing – dollar cost averaging

This is a simple concept that works well when you invest on a regular basis. Assuming you invest a set amount regularly, your money will generally buy more units when markets are down and unit prices fall, and fewer units when markets are booming and unit prices rise, thereby averaging out the cost of units you buy. So whilst it may sound strange, over time investing regularly through falling and rising markets can offer long term rewards. See below for an example.