Key Australian share indices can take nearly six years to return to pre-crash levels after a major correction, demanding searching questions from investors during the current global market turmoil about staying in or getting out of the market, particularly those nearing retirement.

It took the S&P/ASX 300 nearly 70 months to recoup losses after the Lehman Brothers collapse in September 2008 unleashed the global financial crisis (GFC), according to analysis by asset consultancy Frontier Advisors.

Global funds and property trusts remained underwater for more than seven years, with many never resurfacing, while emerging markets took up to six years to recoup their losses for investors who stuck with their holdings, according to Frontier and MSCI.

Investors are under extra pressure now as the residential real estate market continues to tank.

“So with property overvalued and falling and the share market in the grip of increased volatility, what do you do?” asks Paul Moran, principal financial planner with Moran Howlett Financial Planning. “First, take a medium-long term view of the world as a starting point – whether you think capitalism is finished and property prices will fall indefinitely, or whether you see that market ups and downs occur with regular monotony.”

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There is never a “best” time to make these decisions as investment markets are always uncertain. “But when events such as the past few months are taking place, the process can be made that little bit harder,” he adds.

Shane Oliver, chief economist with AMP Capital, says the August to October period marks anniversaries for a number of financial market crises – including the 1929 share crash, 1974 bear market low, 1987 share crash, the emerging market/Long Term Capital Management crisis in 1998 and the GFC.

“Long periods of good growth, low inflation and great returns are invariably followed by something going wrong,” Oliver says about market corrections. “If returns are too good to be sustainable, they probably are.”

The S&P/ASX 200, a narrower measure of blue chip local stocks, performed well in recent years but has yet to top its spike just before the GFC compared with overseas bourses such as the technology-dominated NASDAQ, and blue chip S&P 500 which recently set new highs after record-breaking bull runs.

An annuity means you can't tap your super in case of home repairs or extra travel plans, but you won't run out of income ...
An annuity means you can’t tap your super in case of home repairs or extra travel plans, but you won’t run out of income in your lifetime.

Gabriele Charotte

Merit in staying 

Since most investors’ exposure to the stock market is through superannuation, Frontier Advisors also analysed the performance of four popular investment portfolio strategies ranging from high growth, which is predominantly Australian equities, through to conservative with 70 per cent fixed income.

“Investors who got nervous during the GFC and switched are well behind,” says Frontier Advisors principal David Carruthers. “Those that rode it out have done really well.”

Frontier’s analysis covers the period from the beginning of the GFC in late 2008 through to the end of last month, so it excludes the recent volatility in property and equity markets.

It shows the best performers were diversified portfolios that spread investor risk between asset classes, companies, sectors and geographies while minimising volatility by hedging currency exposure.

The top performing overall asset class included overseas equity portfolios that produced nearly 11 per cent – or more than five times the rate of inflation – with a mixture of global stocks, excluding exposure to Australia.

By contrast, investors in a mixed portfolio of residential properties in eight Australian capital cities produced a return of about 5.7 per cent, narrowly beating low risk bond index funds whose returns ranged from 3 to 5.6 per cent.

The years it can take for investment portfolios to recover from a serious market correction make investment decisions a lot tougher for those aged over 50 considering their retirement.

“If you’re heading towards retirement but suddenly find yourself in a period of particular market uncertainty, what do you do?” asks Moran.

AMP’s Oliver says the answer depends on your risk tolerance.

A reasonably healthy 65-year old with a typical superannuation balance of $1 million can expect to live another 20 years.

That means they might need to work longer, top up their retirement income with the state pension or boost returns on their lump sum by increasing their exposure to riskier asset classes.

Retiree choices

The most conservative is an annuity which can be purchased with your superannuation balance where you hand over your super and the annuity provider promises to pay you a regular income often for the rest of your life, says Moran.

“Unfortunately, this means that you can’t tap your super in case of home repairs or extra travel plans, but you won’t run out of income in your lifetime,” he adds.

“Importantly, annuities set their payment rates based on prevailing interest rates and now is probably not the best time in history to be locking in 20- or 30-year rates.”

For example, $1 million will buy a 65-year-old female a flat-rate monthly annuity for 20 years of about $6000 a month, or around $4750 index-linked, says Moran. 

The other two choices in super are unit-based pension funds and asset-based pension funds. 

Both the unit-based and asset-based pensions require the scheme member to choose the investment mix with some combination of low-risk assets (bonds and cash) and higher-risk assets (shares and property).

“Unit-based pensions effectively sell down assets to make pension payments each month and are susceptible to down markets as the lower the price of the units, the more that need to be sold to pay your pension,” says Moran.

“Asset-based pensions have the advantage of being able to invest in assets and investments that actually pay dividends, rents and interest into a cash account ready for pension payments,” he says. Some allow scheme members to select the shares.

Moran says funds focusing on investing in income-producing investments include Plato Australian Shares Income Fund, Vanguard High Yield Australian Share Fund and the Betashares Legg Mason Equity Income Fund. 

A $1 million portfolio with Plato is currently generating around 8 per cent.  Vanguard and Betashares, which have different investment strategies, are generating about 7 per cent.

“They are designed to maintain a regular income payment whether the share market goes up or down,” Moran says.

“These funds provide the benefits of diversification with a regular income, but investors should understand that the value of the investment will move just as much as the market – it’s the income that’s stable and not the capital. Of course, if you are living off the income and not the capital you should be able to sleep a little better at night.”

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