Super crash

I've been pondering this recently. For my personal super, the portion that is in growth funds has, like everyone else, taken a hit, and the portion that I've got in 'safe' funds has actually gone up by a few % in the 07/08 FY.

Which got me to thinking.

'Chasing the market' never seems to work, except in hindsight. But Blind Freddy can see that shares have dropped and are still dropping. So what about the options to mitigate those losses? If I bailed out of growth funds and shifted into conservative or defensive funds then I'd be shielded from future drops, but of course I'd miss out if the market picked up the next day. And once the unit price has fallen there comes a point where there's no point in switching because the buy/sell spread may well eat up any savings you make from switching. But the main argument against switching is that you're effectively locking in those losses.

But how to work out whether it's worth 'locking in' those losses and switching to less aggressive funds and waiting to ride out the rest of the market dip? That's the tricky bit. I've played about with unit prices and buying and selling in excel but to be honest I've got no real idea if I'm doing it right.

Trying to time the market is extremely difficult (some might say impossible) - especially with managed funds where you don't know the unit price you will actually be transacting at until after the event (unlike direct shares or other listed products).

If you are taking a very long term view with your investments (eg I have 30+ years until retirement), then if you consider the long term returns of a high growth fund - including the bad years ... it should (in theory) still far outperform the more conservative funds - so long as you are prepared to ride out the down periods like now.

However, if you are planning on retiring within the next 5 - 10 years, you'd probably want to be much more conservative - imagine your super dropping 50% in value the year before you planned to retire?

Also, if you are geared into your funds, then you need to manage your LVR carefully - especially with high growth funds which can be far more volatile ... and you also need to consider the holding costs of an investment (interest) if it isn't actually making you money for a period of time.

Oh it's definitely long term. I've got another 30 or so years to go before retiring. But on the other hand, I get about half a dozen 'free' switches during the year so it's tempting to try and dodge another six months or so (or whatever it turns out to be) of negative returns.

Hi Thudd,

Where do you think the stockmarket will be in 30 years?
Before you answer this, pull out a long term chart.

Don't waste your time trying to time switches.

While past performance is no guarantee of future performance, we can discuss it in about 30 years

Cheers,

Dan

Thud

I know some people @ my workplace who've recently switched over to cash.
Their thinking is the same as yours.
They know that they've already lost 8% or so but they fear that there is more to come.
I think that when we receive our super statement there will be more people running for the exits...
and this could trigger more falls and more losses....
Cheers

The other things that's crossed my mind is whether it's worth thinking about switching the growth portion - unit price currently 12.5ish - to another growth fund with a lower unit price. Basically to take advantage of the 'buy in gloom sell in boom' maxim to increase my quantity holding while prices are down, and aim for instead of 1 unit @ 12.5 moving (say) one point up to 13.5, have 8 units @ 1.5 moving that same point or so up to 2.5. Does that work? Or to put it another way, in general terms if unit prices of similarly invested funds go up (or down) do they tend to move by roughly the same relative percentage amount or by the same absolute dollar amount?
(it sounds like a dumb question, I know...)

They should move by roughly the same relative percentage ... so there is no point in moving based on unit price - in fact you would probably be worse off due to buy/sell costs of moving.

switching to cash is a dangerous thing to do, becuase once the market turns around, you might miss out 50% of the rebound before you switch back into shares..

if your switching, then your in the wrong fund to start with. if you can't accept the risk of the fund, then don't enter it in the first place, regardless if we are in a bull run.

It makes for an interesting contradiction in advice.

On the one hand, when it comes to super it seems to be "suck up the losses, you're in it for the long haul."

Yet there's also a fairly common consensus when it comes to individual investment in funds that holding onto a declining fund is not a good strategy because you're throwing good money after bad waiting to 'get your money back'. (often based on an emotional decision that selling up is admitting you backed a loser which people are sometimes reluctant to do)

I think it very much depends on the context.

If the fund in question is just down because the entire market is down, and you expect it to recover in due course ... then selling out at what may well be the bottom is not such a great idea.

However, if the fund is sector specific and that sector is getting hammered, with little chance of recovery in the share-medium term (eg listed property ), then I'd be more inclined to find a better place for the money.

The key thing is - if you are going to sell, you really need to do it as soon as you are sure the market is heading down, rather than waiting until there is blood on the streets - since by then it is far too late. Otherwise, I think you are better off just holding on - provided you are confident that you haven't bought a dud investment.