Why you shouldn't panic
In Australia, we're in a unique position when it comes to retirement savings. Our superannuation funds are heavily weighted to the stock market, meaning they're subject to the risk that arises when it dips or plummets.
So what would a share market fall mean for your super? And how can you safeguard your nest egg against future falls?
Stock markets took a hit in the latter half of 2015 and many super funds incurred losses in the last 12 months. However, following a more recent rebound, indications are more positive than they have been. A loss of 2 per cent may not sound like much. But someone with $200,000 in super, for example, would be down $4,000 over a 12 month period.
In the long run, dips like these probably won't make a big difference – the market will recover, and there'll be periods of high returns. So should you worry now? If you're planning to retire soon you might have some cause for concern, but if you're young you're probably safe – because dips and peaks tend to level out in the long run.
"It also depends on how you're invested and how you feel about risk," says Senior Wealth Adviser with Macquarie Wealth Management, Noel Yeates. "There's no 'one size fits all' solution here – and what you think is best might be different from what other people think, including your partner."
So here are four of Noel's tips to assess any damage to your super after a stock market dip – and protect it in the future.
1. Don't panic
The first thing to do is remain calm. Super is like any other investment – they're all tied to a market, whether it's stocks, property or bonds. Understand that markets are cyclical – meaning they go down, but they also go up. Any changes in those markets will affect your investment.
Noel says it's important to know how your super is invested. "That's how you can understand what a dip means to your balance. Sometimes people become more worried than they need to be.
"You should always be aware if something goes down, but it's also important to recognise when it goes up. The key is not to focus on the day-to-day movement but whether you're trending in the right direction and on track to your goal.
"Often we find people worry about a dip of 2-5 per cent but don't realise they may have recently made 15 per cent. Their view is clouded because they're only looking at a short-term window."
2. Consider changing your investment strategy
When you get closer to retirement age, falls will affect you more. You have less time to recover if you want to withdraw funds within the next few years, and this is when you may need to change your investment strategy.
The best path for you depends completely on your circumstances. So if you're concerned, ask your adviser or chat to your fund to work out if you're invested the right way and whether you can withstand a dip.
"Work out what you would do if your fund lost a certain percentage value," says Noel, "and how long you would manage without being concerned."
Keep a cash balance available – so if a market does dip you can make additional investments while they're good value.
3. Make the most of the dip
For some people a dip is good news. A direct investor, for example, can take advantage and buy when the market is low.
"Make sure you have a clear view about timing, when to enter and exit a market. If you enter a market when it's reasonably low and flat you'll get better value."
4. Safeguard your fund for the future
If you're still worried about future dips, there are a number of steps you can take now to mitigate the risk in your super fund.
"You need to understand what you've invested in," explains Noel.
Especially if you're planning to retire soon, ask yourself whether those investments match your risk profile. If you are unsure, ask your adviser – they are best placed to ensure you have the appropriate level of risk in the portfolio.
He also emphasises the benefits of diversification – splitting your investments up within super. A conservative approach for those nearing retirement might be to invest the majority of your super in fixed interest and cash, while a growth option would invest mostly in shares and property. Your financial adviser can help you better understand the risks and rewards of spreading your investment to manage risk and returns.
And his final tip?
"Keep a cash balance available – so if a market does dip you can make additional investments while they're good value."
Remember – while the impact of stock market dips on your super can look scary in the moment, they're not permanent. It's important to look at the bigger picture. Super is like any other investment – with a smart diversification strategy you can sit back and watch your nest egg grow over the long term, all the way to a comfortable retirement.