Chances are you've heard the word 'volatility' mentioned more over the past month or two than at any time in 2024.
That's understandable, as the global markets (including the ASX) have just undergone their largest bouts of volatility that we've seen in years.
Between 14 February and 13 March, the S&P/ASX 200 Index (ASX: XJO) plunged by a horrid 9.4% or so – more than its average annual return over the past few decades. Since 13 March, the index has rebounded by around 3.2%. But given the ongoing uncertainty surrounding the United States' new trade policies under the Trump Administration, as well as ongoing turmoil in the global geopolitical arena, many investors aren't exactly assuming that volatility is now behind us for good in 2025.
Only hindsight will be able to answer that question.
Now, most investors hate market volatility, and understandably so. It's never fun seeing the value of your investing portfolios, which usually contain a good chunk of one's life savings, seesaw in value, completely out of our control.
This hatred extends, and is perhaps even amplified, when it comes to one's superannuation fund.
Since our super funds are supposed to be our nest eggs, eggs that will hopefully provide enough cash to fund decades-long retirements, we tend to be particularly anxious when market volatility comes a-knocking.
Super funds know this. As such, they usually take steps to mitigate the effects of market volatility for members.
Let's discuss what these steps are.
How do super funds protect against volatility?
The only way to protect a super fund from market volatility is by ensuring that some of a super fund's investments are deployed into assets that either hold their value in volatile times, or even increase in value.
This is why most Australians' super ends up in what's known as a 'balanced fund'. The 'balance' of a balanced fund aims to allow members to enjoy the wealth accumulation that the share markets can bring, while hedging against the volatility that comes with it using other assets. Or, to put it another way, balancing risk and reward.
The two investment classes that are typically used to this end are cash and government bonds.
Cash, as we all know, is an asset that is completely stable, and unaffected by what happens in global investing markets. If one has 100% of their wealth in cash, then a market crash will be of no consequence to their overall net worth. That's why the most conservative superannuation funds are mostly invested in cash.
Government bonds are also used to mitigate market volatility, thanks to the guaranteed income they provide. Government bonds do trade in markets of their own, meaning that their prices can move up and down. However, the bond markets function very differently from the stock markets. Bonds can even rise in value during a market crash, as many investors sell out of their shares to buy bonds in these situations.
Foolish takeaway
Australians might assume that volatility is inherently a bad thing, and the more a super fund avoids it, the better. This may be a misguided view for many Australians to take. If you are retired or a few years away from retirement, it is true that volatility can be a problem. Investing in more conservative asset classes might be beneficial as a result.
However, if retirement is still a decade or more away for you, you should welcome volatility. If stock prices are lower, it means that your super contributions are being invested at lower prices, which should give your portfolio a long-term boost as the market recovers.
Further, if you're a younger Australian with decades remaining in the workforce, your priority should arguably be maximising returns, not minimising volatility. These goals are usually mutually exclusive – you can't have one without the other. As such, it's probably more advantageous for younger Australians to ensure their portfolios are mostly, if not completely, invested in shares. Volatility and all.
This is all theoretical, of course. If you're unsure about your own situation, make sure to talk to a financial advisor. But don't assume that volatility is always your enemy. Like many things in this world, it is a double-edged sword. Find the right edge for you.
