Are you a COVID cash switcher? 

Investing can be emotional.   

That’s never been truer than the early months of the COVD-19 pandemic last year, when share markets resembled a rollercoaster with more drops than climbs.  

Nobody likes watching their balance fall, particularly if you’re close to retirement and your super isn’t just future savings – it’s your income. It makes it hard to stick to the long-term plans you set yourself when things looked less uncertain. 

But while it’s tempting to switch to the seeming safe haven of cash investments, is it the best move?  

WHY MEMBERS SWITCH INTO CASH 

The share market is falling, newspaper headlines are screaming at you, and it feels like you should be doing something. Fleeing to cash to try and minimise your losses seems logical. Cash investments generally carry less risk, after all.  

But what happens after your balance – or a percentage of your balance – has been switched over and markets start evening out again? Do you stay or do you go? 

TIMING THE MARKET   

Some investors may have switched to cash temporarily, intending to switch back to market-linked assets when things stabilised. This is called “timing the market”. The idea is to protect against heavy losses, then jump back in early enough to benefit from a bounce-back. 

Figuring out the right time to re-enter the market is notoriously difficult, even for savvy investors. If you get it wrong, you risk missing out on market rebounds. Last year, for example, Australian share markets roared back after the initial coronavirus panic. Investors who didn’t switch back in time failed to fully capture the recovery.  

LOCKING IN YOUR LOSSES  

Not only do you risk missing out on a market bounce-back, you’ve effectively “locked in” your losses by selling your investments for cash after they’ve already lost value.  

And it becomes harder to make your money back, especially if you stay invested in cash. While cash is low risk in the sense that it’s unlikely you’ll see a negative return, it’s high risk if you’re trying to grow your super as it will be outpaced by inflation over time.  

SUPER IS A LONG-TERM INVESTMENT  

It’s important to remember that super is a long-term investment. Rocky periods are to be expected. While it’s not always easy to endure these rough patches, it may help to tell yourself that this is normal share market behaviour – even if things like the Coronavirus pandemic are abnormal. Major share market crashes occur because of something that wasn’t foreseen and priced into the market. Past examples include the Global Financial Crisis and the dotcom bubble burst – both of which were followed by strong recoveries. 

WHAT SHOULD YOU DO?  

If you can, it makes sense to stay invested and stick to your long-term investing plan when markets change, rather than selling at the bottom and risking crystallising your losses. History shows us that share markets typically do recover, even from serious falls. 

If you’re close to retirement, or you’ve already retired, these losses are felt more keenly. But there is still opportunity for recovery, especially if you plan to draw an income for years.  

If you did switch into cash last year and haven’t yet switched all or some of your money back, it could be worth seriously considering this so you can continue growing your super.  

One last tip. While it’s easy to say and less easy to do, try to recognise your response to market changes for what it is. If you’re strategically making a change, that’s one thing. But if you’re reacting emotionally, stop and ask yourself: is this the right move for my long-term plan? 

WE CAN HELP  

If you’re currently invested in First Super’s cash option and are concerned you’re missing out on higher returns in a different investment option, contact us. We can help you work out the right level of risk for your situation, so you can stay focused on your long-term goals.  

Call the Member Services Team on 1300 360 988, email mail@firstsuper.com.au, or book a call-back with a First Super Financial Planner.

MORE INFORMATION

To learn more about investing with First Super, read Investing Your Super and watch our FIRSTtalk episode Understanding Your Investment Choice.