When it comes to the words 'ASX market crash', many Australian investors will immediately start sweating about their share portfolios, regardless of whether they are held inside a superannuation fund or outside.
For many Australians, super is the only investment they have in ASX shares. And seeing as our super funds are our biggest ticket to a comfortable retirement (or lack thereof), a market crash can cause a lot of concerns about one's retirement.
So how can an investor protect their super fund from a market crash?
Super protection fund?
I'll just start off by saying that no one likes watching the value of their assets (and by extension their wealth) drop as a result of a market crash. It takes a lot of mental discipline to master the emotional baggage that comes with investing, even for experienced investors.
We train ourselves not to be 'bothered' by watching our shares fall in value and to 'take advantage' of a market crash to buy more. This always feels great in hindsight, but not exactly during the throes of a crash. As a personal anecdote, I was investing heavily during the March share market crash, but it was still scary, let me tell you. Of course, looking back, I'm glad I did, but it was a different story in mid-March.
But I digress. So, what does this have to do with super?
Well, for most people, at least part of your super fund will be invested in ASX and international shares. That means your super fund will rise in value when shares do, but also fall when shares don't.
But for anyone who is more than 10 years' away from retirement, it's best to ignore the movements of your super fund, especially if you have the kind of (very understandable) temperament that can't deal with seeing your super fund fall in value.
Don't swap returns for low volatility
There's no getting around this, but there is no real alternative to shares if you want your super to grow at the highest rate it can. Shares are a volatile asset class, but they are also one of the only assets that have the power to get you a decent return these days. Interest rates are virtually at zero. That means that any returns you can get from 'safer' investments like cash and government bonds are almost negligible today.
That, in turn, means that you essentially have 2 choices in super – invest in growth assets like shares that will fluctuate in value (sometimes violently), but have the potential to give you a 7%, 10% or even higher return most years, or else stick with cash and bonds and get a 'safe' 1-2% return annually, if you're lucky.
If you are nearing retirement age, by all means, stay conservative with your super. But if you're under 50 or have more than 10 years until retirement, I don't think you should bother trying to protect your super. The tradeoff between less and more volatility is lower returns, there's no way around it.
