Just like the traditional investing you do, your super invests in things like shares, bonds and property. So what does this mean if any of these asset classes, particularly shares, experiences a downturn or, worse, a complete crash? Does your super go down with it? In this article, we’re looking at the factors that affect super performance and whether super ever plummets as other investments do.

How super investments work

First, we’ll get the basics of super investments out of the way to provide some context. For this article, we’re mostly going to look at retail and industry super funds – that is, funds managed by super providers or industry bodies. But we will briefly dive into self-managed super funds (SMSFs) a little further down.

In case you weren’t already aware, the money sitting in your super is invested on your behalf by your super fund. The fund’s overall aim is to help grow your money over your working years. By the time you retire, the goal is to have a decent nest egg to see you through your golden years.

Most super funds invest in a range of asset classes, including shares, bonds , real estate, infrastructure and cash. Even though you’re not doing the actual investing, you’re largely the one in control of where your money goes. In your super account, you can toggle your investment preferences according to your financial goals and risk tolerance. Generally, you can pick between investing strategies that range from conservative to high-growth. Sometimes, you may even be able to select individual assets directly.

So, is your super safe?

Overall, super is considered a pretty “safe” investment. (We’ve used quotation marks here because no investment is ever completely foolproof, even the more conservative ones.)

The first reason is that super has unique protections other investments don’t. These are designed to help keep superannuation more stable and secure for retirees so they have a good shot at a comfortable retirement.

One protection is the regulatory framework that governs superannuation in Australia. This government-led initiative dictates how funds can manage and invest members’ money.

The Australian Prudential Regulation Authority (APRA) is the body responsible for supervising super funds to ensure they stick to certain regulations around governance, risk management, reporting, operations and recovery. APRA ensures that super funds act in their members’ best interests.

The Australian Securities & Investments Commission (ASIC) helps protect consumers , too, by keeping super funds’ conduct in check. The organisation’s overall goal is to maintain consumer confidence in Australia’s super system.

Retail and industry super funds are also overseen by experienced fund managers who have many years of investing expertise under their belt. Plus, super funds can access coverage for any lost or stolen funds – this is often provided by insurance or compensation schemes.

Then there are tax benefits for super . Some contributions are taxed at a lower rate than your regular income, and investment earnings within super are taxed at a concessional rate. These are designed to incentivise Australians to save for retirement and reduce their dependency on the Age Pension. This means the government effectively has a vested interest in super.

Lastly, superannuation has a long-term focus – it’s designed to grow over many decades. Like our long-term approach to investing here at Pearler, super aims to withstand market downturns and corrections and deliver good returns over the long haul. (NOTE: super holders can also toggle their preferences to a more short-term outlook as they near retirement).)

While not necessarily an indicator of future performance, super's past performance has been fairly strong overall. Historically, it’s demonstrated positive long-term performance despite short-term dips, with an average annual growth rate of 5.3% among conservative funds.

What can impact super’s performance?

All of that being said, super doesn’t operate in isolation. Given your super is invested in variable assets like shares, bonds and property, it’s absolutely at the mercy of several external factors – for better or worse. The main ones include:

• Economic conditions: Events like economic growth or downturns , recessions and high or low-inflation periods can all influence your super. This is because they directly affect investment returns
• Market dynamics: Stock or real estate market performance also impacts superannuation returns. Interestingly, about two-thirds of super is held in Australian and international stocks and bonds, meaning super performance is very much tied to the stock market
• Government regulations: Superannuation is heavily regulated by the government, with strict rules overseeing everything from contributions and withdrawals to tax on super. Any changes in these regulations can influence the growth of super accounts
• The fund itself: Individual super funds have their own management practices, entailing their investment strategy and approach to risk management. This can affect their performance during volatile market conditions. For instance, during the recent spate of interest rate hikes, some funds performed better than others

There are a couple of examples where super performance has fluctuated significantly as a result of different events.

The first is the GFC, which undoubtedly had a profound effect on finance around the world, including super. In 2009, many super funds saw huge losses as markets crashed. Many customers lost substantial amounts of retirement savings, too. Despite the severity of the downturn, most super funds were able to recover, slowly but surely. The markets rebounded and over the years since, there’s been significant growth in the share markets.

Another, more recent, example was the stock market crash during the pandemic. In 2020, the market lost 37% in only three weeks, taking super funds along with it. Once again, though, funds were able to stabilise, and many have seen strong returns in the years since.

So while there may be temporary setbacks, know that these are quite rare. Keep in mind, though, that market fluctuations are a normal part of the economic cycle. It’s more likely that your super can rebuild over time – even if that time looks like 7-10 years. And for every downturn, there are also periods where super sees periods of notably higher returns. With all of this in mind, it's worth considering your time horizon and choosing a relevant risk profile within your super (which we discuss below). And when in doubt, speak with a financial adviser.

The difference with SMSFs

Most of this article pertains to retail and industry funds, but it’s worth mentioning SMSFs here too.

SMSFs are effectively private super funds managed by the members themselves. Under the current rules, SMSFs can have up to six members, however, each and every member is also a director and trustee of the fund. This means they’re directly involved in handling and benefiting from the fund.

The main advantage of a SMSF is that it offers greater flexibility in investment choices, with members able to personally select and customise their portfolio. However, SMSFs typically invest in many of the same assets as traditional super funds. They're equally swayed by economic conditions, market dynamics and other external factors that affect different investments, meaning they can also experience downturns.

Plus, investment choices are made by the directors. The success of those investments depends largely on the directors' investing expertise and decision-making skills.

Lastly, it's worth mentioning that SMSFs aren’t offered the same financial protection as industry and retail funds. If the money were to disappear due to fraud or mismanagement, there’d be no compensation or safety net.

The other benefits of super

Beyond its relative security, there are several other key benefits to your super, including:

• Tax incentives: If you make voluntary contributions to your super, they may be taxed at a lower rate than your income tax rate – possibly as low as 15% (but, for more personalised insights, speak with a qualified tax accountant)
• Government co-contributions: By making after-tax contributions to your super, you may be able to take advantage of the government’s co-contribution scheme . This is where the government matches your contributions by 50 cents for every dollar you put in, up to a maximum amount of $500
• Insurance: You can access different types of insurance via your super , including income protection and life insurance
• First Home Super Saver (FHSS) scheme: Under the FHSS scheme , you can withdraw up to $50,000 in voluntary super contributions to put towards your first home

How you could try to mitigate potential losses

If you’re looking for ways to try and protect your super, these ideas may be worth considering.

• Educate yourself on your super: Understanding how your super works is a vital first step. Know what you’re invested in and how your fund approaches risk management. And while you’re at it, get up to speed on the cyclical nature of share markets , too. You’ll no doubt have a clearer idea of market fluctuations and how your super may be impacted
  
• Know your risk tolerance: Your risk tolerance is a gauge of how much risk you can handle, and it ranges from conservative to aggressive. If you’re on the more conservative end of the spectrum, you might prefer a more cautious and stable approach to super investing. But if you’re more aggressive, you could be more inclined to go for a high-growth strategy. Just know that conservative investing strategies may deliver lower returns, and a growth one might result in bigger losses during volatile periods
  
• Consider your time horizon: This refers to the years you have left before you plan to retire. Generally speaking, market downturns mostly affect those who are about to retire or have already finished working. If you’ve still got many decades of employment ahead of you, you may be in a better position to weather downturns and recover from potential losses. If you’re planning to retire in the next few years, you may prefer to preserve your wealth with a more conservative strategy. Regardless of your circumstances, only you can determine your own risk horizon
  
• Think before you act: You may be tempted to switch to a conservative investment strategy or an all-cash portfolio (typically considered a safe investment option) as a knee-jerk reaction to a downturn. But doing so can have long-term detrimental effects. It could mean missing out on the potential high growth of other assets, especially if you’ve got many years ahead of your retirement. (We’re not saying you shouldn’t adjust your investment strategy – or, for that matter, that you should. We're merely hoping to give you some food for thought.)
  
• Keep a calm, long-term view: Overall, try and stay calm in the face of volatility. Super is a long-term game, and the market is cyclical. Your best bet is to avoid monitoring the short-term movements of your super and ensure it’s trending upward over the long term
  
• Chat to a professional. Many financial advisers help with retirement planning, including how to protect your super from potential losses. Consider reaching out to one for personalised advice

A final thought on super and risk

Just like any other investment, super comes with a certain level of risk. Even if that risk is mitigated by different safeguards, like government regulations, the expertise of fund managers and the overall upward movement of financial markets.

Our main piece of advice for any investment, super or otherwise? Always do your research and understand how it works so you’re informed, confident and prepared.

If you ever want personalised advice on your super or assistance with retirement planning, chat to a licensed financial adviser who can help you navigate your situation. A tax accountant may also be useful if you want guidance on the tax treatment of your super.