Super funds have performed well over recent years but doubts have emerged as to whether such success can continue. Workers nearing retirement don't want to see a collapse like that of 2008-09.
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The average diversified growth super fund has earned about eight per cent per annum over the last three, five and ten years according to investment research firm Lonsec.
This success has been attributed to the recovery from the 2008-09 global financial crisis, the decline in interest rates forcing more investors into shares, and compulsory super providing a constant flow of new money into markets.
These factors have helped but the biggest contributor has been a healthy and growing global and Australian economy, with increasing personal incomes and spending, and rising company profits as a result. In other words, people and businesses going about their normal daily lives.
In the past when yields have inverted (and stayed that way) a recession has followed within a couple of years
- Money Matters' Russell Tym.
Now there is talk of the "inverse yield curve", a likely global recession next year, the trade wars, a slowdown in Europe and so on. It's enough to cause super fund members to wonder if they should switch their funds to cash.
The "inverse yield curve" refers to interest rates on long term bonds being lower than on short term ones. Investors normally demand higher interest to lend money for longer. Ten-year US bond yields briefly dropped below two-year rates last week but quickly reverted to normal.
In the past when yields have inverted (and stayed that way) a recession has followed within a couple of years. If investors will accept lower rates for longer term loans they must expect even less return from other investments, implying a recession.
Now interest rates are extremely low everywhere, and negative on government bonds in some countries. The differences in rates for different terms are minimal. If ten-year US bonds pay 1.5 per cent and two-year bonds 1.6 per cent does that really tell us anything?
The trade wars initiated by the US are slowing global trade and economies. It would help if they could be resolved. Some indicators also suggest slower progress ahead. There will always be doubts about the future, that's natural.
The best response to these concerns is diversification. Cash, fixed interest, property and shares perform differently at different times. So too will shares in different countries and industries. Disruptive technologies also make picking tomorrow's winners more difficult.
It's important to retain some defensive investments even if they earn little but for long term investors such as super fund members it's not sensible to be excessively defensive.
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