One of the oldest share market mantras is that you should aim to buy low and sell high.
It is a simple and self-evident truth but it is one that is widely ignored and even reversed, which is why individual investors and even professional investors returns usually lag the market overall.
The current bear market is no different, with large volumes of sellers bailing out of the share market all the way through the crash period.
Many super fund members are heading for the dubious “safety’’ of cash
A similar pattern is now coming through in superannuation funds, with a flood of older super members locking in the effects of the crash into their returns by switching out of balanced funds and into cash.
The giant Sunsuper fund, which has almost $70 billion under management, has seen almost $1 billion switched into its cash and capital-guaranteed options.
Similarly, the large Hostplus fund, which has $53 billion under management, has seen $800 million switched into cash options since Australian and overseas shares began falling at the beginning of March.
Shares being sold
Most of that money will have come out of balanced options, so shares will have been sold down at depressed levels to switch into cash.
It is a human reaction to react with either fight or flight to damaging situations, although neither reaction is particularly helpful when it comes to the share market.
In this case though, flight could be particularly damaging because by selling, super fund members are locking in losses that have happened due to turbulent markets and if they stay in cash they will usually miss out on any market improvements.
Cash returns low
Cash returns are also particularly low given that the RBA official interest rate is just 0.25%, so they are unlikely to even keep pace with inflation, reducing potential long-term retirement savings even further.
Fortunately, this buy high, sell low approach is fairly small compared to the overall asset base of the big funds – although it could be damaging to the individuals involved, given that history shows those who stay the course and remain invested over time do better.
However, there is another much more dangerous hurdle approaching that could leave a much larger dent in retirement savings.
Super fund withdrawals of $20,000 a person could really hurt
The Federal Government’s plan to allow those hit by the COVID-19 pandemic to make a tax-free withdrawal of up to $20,000 from their super accounts over two years could cause some real damage to funds and to final retirement balances.
Depending on the age of the person making a withdrawal, they could be selling out at a market low and robbing themselves of up to five times the amount of their withdrawal in their final retirement balance.
There are several issues with the withdrawal – the main one being that super funds are ill equipped to deal with a large number of cash withdrawals at the same time.
Funds not well equipped for a rash of withdrawals
While super funds do have a certain number of retirees in the pension phase, their pension payments are generally much lower than the deposits being made by other members in the accumulation phase.
A large volume of withdrawal requests could cause problems for the funds, including them having to liquidate some investments including shares, property or infrastructure at an inopportune time.
Indeed, some funds have asked for the Tax Office to become involved in the process because it was never envisaged that super fund members could withdraw from their funds when they were in the accumulation stage, other than in certain well-defined emergency access situations.
There are genuine concerns about the liquidity of some funds under a flood of mass withdrawals, with warnings that some funds may need to freeze or delay redemptions.
Withdrawals could be $27 billion – or much more
According to Treasury estimates, the withdrawal scheme should be for around $27 billion, which represents just 1% of the total $3 trillion superannuation asset pool.
There is a chance that the estimates would be very conservative and there is a rush of withdrawals from people hard hit by losing employment during the COVID-19 crisis.
Figures produced by the prudential regulator show there is $184 billion in cash across the whole super system and $45 billion in the MySuper default sector.
However, industry figures say funds need to maintain a cash buffer and are concerned the streamlined early access to super could trigger a mass sell-off of stocks.
Senator Bragg hits out at funds – who hit right back
Liberal senator Andrew Bragg has hit out at super funds questioning the government decision to free up super for people affected by the pandemic, saying they have poor risk management and are too reliant on illiquid assets, including property and infrastructure.
‘‘If prevailing market conditions require superannuation funds to sell assets at depressed prices, and therefore exacerbate poor investment performance, customers should be asking hard questions of their super fund’s management team and trustee board,’’ Senator Bragg said.
‘‘The impact of the coronavirus on the domestic and global economy is clearly unexpected and severe. It should not give cover to funds for imprudent practices.’’
Former Premier Bracks says claims could be as high as $54 billion
Senator Bragg’s criticisms have been disputed by industry superannuation leaders, including Cbus chairman and former Victorian Premier Steve Bracks.
Mr Bracks has warned that longer-term retirement savings and the share market could both be distorted if stocks were sold in the midst of a severe downturn to satisfy demand for the early release scheme.
Mr Bracks said he thought demand for the early release could be double what has been estimated by the government and wants the Reserve Bank of Australia to provide initial funding for the scheme to prevent market losses affecting all members of superannuation funds.