There’s a bear in there — the recent downturn in financial markets

The past financial year’s investment returns have proven to be the worst since the inception of compulsory superannuation in 1992. Figures vary from different rating agencies, but estimates of about minus 6 per cent for most default options (with a split of 70 per cent growth and 30 per cent defensive assets) are common. This comes after four years of stellar growth in the markets as the bulls ran with courage and optimism. However painful reading your annual statement will be, it is important to keep in mind that superannuation is a long-term investment and that markets by their nature move in cycles.

So how did the bears emerge amid the resource boom Australia is experiencing? How does the American sub-prime mortgage fallout affect Oz Boomers? What is the long-term effect of inflated petrol prices? And most importantly, what about my super?

The Australian economy has unfortunately moved into schizophrenic mode with the resource sector moving forward while the banking sector takes a battering. Resources have consistently provided a strong source of national income and employment, with mineral sales buoying state economies as a result of the overseas demand. The financial sector has lost value because of sub-prime holdings and tighter money.

So what happened in America? Think of this scenario — mortgage broker X “sells” a mortgage to an individual under a “honeymoon” deal. X receives a commission for the sale. The banks bundle the loans as sub-prime mortgages and on-sell them to other banks around the world. When the “honeymoon” is over, the interest rates jump sharply and the mortgagee defaults. Add to this mix high unemployment and the rate of defaults on mortgages increases further. So banks worldwide are now holding securities which are not worth their paper value. This leads to a credit crisis — world banks are no longer willing to lend money cheaply as confidence in the world banking system is seriously dented.

And next, you guessed it, interest rates rise, causing meltdowns, slowing of economies, increased unemployment, reduced company growth and less disposable income for individuals. As a result, world banks are no longer lending money at low rates because confidence in the world banking system has taken a strong hit.

Now, let’s add some expensive petrol to this smoldering fire. Inflation — did I hear you say?

And there you have it — the stock market (in general) is not happy. The ASX has shed thousands of points in the last financial year and super fund default returns are negative.

It is extremely important to think long term with your super. Look at the three-year and five-year returns for your fund as well as the fees.

And on the positive side, if you are still contributing, is that you are buying units at reduced prices — dollar coast averaging is working for you. If you haven’t cashed out or changed options, you have suffered a paper loss.

I look forward to putting together some more super information for you in future “Super Smart” articles and let’s hope the news is plus rather than minus.

Bernard O’Connor