In recent times we have seen an increase in share market volatility driven largely by negative sentiment about the state of the global economy.  In September last year we communicated to you about the main causes for this.  In summary and in no particular order of importance they are;

1. Ongoing concern about the state of the Chinese economy
2. The US Federal Reserve decision to increase official interest rates
3. The Syrian conflict and the associated humanitarian crisis now playing out in that region and Europe more broadly

In addition to these challenges there has been significant downward pressure on commodity prices which has obvious negative connotations for Australia and makes dealing with the Federal budget that much harder as our terms of trade (national income) have fallen over this time period.

Having said that, our economy is making the transition from enjoying the fruits of the mining boom (which is now well and truly over) to a more diversified and balanced economy.  This transition is not easy, however it will deliver a far more resilient and dynamic Australian economy in the future.  This is a good outcome.  In the meantime we have stable employment growth and our economy is growing.  Recent economic data shows our economy growing at an annualised pace of 3% which all things considered, is an admirable effort.

What does this mean for markets?

As you know APC tilts our portfolios to particular sectors of the share market.  These are Smallcompanies and Value (or cheap) companies.  When sentiment is positive (or confident) these two sectors tend to outperform the broader market.  However when sentiment is negative, as it has been over the past 9 months, these sectors tend to underperform the broader market.  Over the near 30 years that APC has been operating, we have seen these times before.  Sentiment always returns to positive, from a period where it has been negative.  The only question we don’t know the answer to is when this will happen.  In the last six months small companies have outperformed both Value companies and Large companies in Australia and Globally.

What to do?

What we certainly do not do is panic!  We’ve seen these times before and we will see them again.  So, as per our communication in September last year, if you are a long term investor (not speculator) focusing on Wealth Accumulation, periods like this are fantastic buying opportunities.  If you are Consuming your wealth to support your lifestyle in retirement, APC has once again implemented our Defensive Pension Strategy, whereby we fund pensions from defensive assets (cash and bonds) only.  In doing so we protect growth assets (shares and property) by not selling them during heightened periods of share market volatility.

APC monitors these decisions regularly on your behalf.  Our Directors and Shareholders, as well as team members, are also invested in our Classic portfolios.  Rest assured that our recommendations to our clients are also the same recommendations for our own portfolios.

The twists and turns of financial markets in the opening weeks of 2016 have left many investors feeling like victims of car sickness. So what’s driving the volatility, how unusual is it and what can you do about it?

Volatility is not unusual at times of heightened uncertainty. Some of the issues cited as unsettling markets recently have been doubts about the extent and impact of China’s slowdown, steep declines in oil prices and what all this might mean for the path of US interest rates this year.

But such external events are not the only things that influence prices. Markets can also move based on investors’ own changing tastes, preferences and risk appetites. None of these variables are constant.

The key point is that expectations about the global economy, company profits, interest rates and other indicators constantly change on new information. And those changes are reflected in the prices of securities.

Indeed, if prices didn’t change at all based on news, there really would be cause for worry because it would raise questions about whether markets were working effectively.

So are the recent market moves out of the ordinary and do they necessarily point to further price declines? Let’s look at the data…

The world’s biggest stock market did have a particularly poor start to the year. In fact, as measured by the benchmark S&P-500 index, the US market suffered its ninth worst January since records began in 1926.

Does this mean it is on course for a down year? Not necessarily. In the US market over the past 90 years, a negative January has been followed by a positive performance for the rest of the year 59% of the time.

What about the Australian market? It’s true that the S&P/ASX 300 total return index fell 3.2% in January, but that is nowhere near its worst start to the year. In the first month of 2008, for instance, it fell 11%. In 1981, it fell 7.7%.

While Australian data only goes back to 1980, there is also no clear pattern here between January and full-year performance. A negative start in 1993, for example, was followed by a full-year return that year of more than 40%.

In more recent years, who can forget the early months of 2009 during the peak of the global financial crisis? The Australian market started the year with a fall of nearly 5% yet by the end of that year was up by more than 37%!

The chart below shows that of the past 36 years back to 1980, the Australian market has risen in 26 years and fallen in 10. While the return in January has been negative 14 times, in nine of those the market ended up for the year.

This isn’t to predict that we’re on course for a similar turnaround in 2016, but it does serve as a reminder about the danger of drawing inferences about future market direction from what has happened in the immediate past.

How about the pattern of recent volatility? Every day, it seems, we hear on the morning radio news of a big fall on Wall Street, only to be told of a similarly spectacular rebound a day or two later.

The truth, however, is the recent bout of volatility has not been exceptional. In the US market, a common measure of equity volatility is the ‘VIX’ index. This jumped to around 27 in January from the mid-teens late last year. (A higher number means more volatility).

But that is still only about half of the levels of August to September last year when China devalued its currency, in mid-2013 at the time of the so-called Fed “taper tantrum” and again in in mid-2011 when global recession fears were intensifying. And it is virtually a quarter of the peak levels the VIX reached when Lehman Brothers collapsed in October 2008.

Similarly, in Australia, volatility has risen this year, but it is well short of the levels experienced in the GFC. Chart 2 below shows the S&P/ASX-300 index as measured by historical volatility on a 15-day rolling basis.

So what lessons can be drawn here? And more importantly, what can you as an individual investor do about the volatility?

• First, there is no hiding from the fact that for many investors market volatility can be unsettling. But we have seen that extrapolating past market moves into the future is not a reliable strategy.
• Second, prices move on news. Unless you have the extraordinary and unheard of ability to anticipate news, you can’t predict with any consistency what markets will do next.
• Third, while you can never fully escape volatility, you can moderate the ups and downs by diversifying across different asset classes (stocks, bonds, property and cash) and within asset classes.
• Fourth, what ultimately matters is not your ability to second-guess short-term market moves, but how your portfolio is travelling relative to your own stated goals, risk preferences and investment horizon.

If you feel uncertain, your advisor is there to keep you focused on your long-term plan and to rebalance your portfolio to ensure you are not taking any more risk than you need to reach your objectives.

To use our original analogy, constantly watching the short-term gyrations of the market when your goal may be years away is like reading in a car on a rocky and winding country road. You risk getting car sick.

A better approach is stay focused out the window on that particular point on the horizon that represents your destination. Every now and then, you can pull over to the side and check your roadmap (in this case your financial plan).

Everyone feels the rough ride, it’s true. But if you can agree with your advisor that your plan is still the right one for you and that you remain on track to reach your destination, the process of getting there becomes a lot easier.

An adequate retirement income is – like beauty – all in the eyes of the beholder. The Australian superannuation system has for the past 20 years been concentrated more on the value of the account balance at the time of retirement – the ‘how much is enough’ question.

That debate is now shifting quite noticeably into the realm of what is the level of retirement income required.

Neither question comes with a definitive answer.

But we should expect the definition of “adequate” to become one of the most heavily debated concepts in superannuation in the year ahead.

The Federal Treasurer, Scott Morrision, has already kicked things off from the government’s perspective with his speech to the recent Association of Superannuation Funds of Australia (ASFA) conference in Brisbane.

He outlined the high-level framework of how the federal government is thinking about super – particularly the cost of tax concessions that super savings enjoy.

He said that “as a government we want to be very sure that superannuation tax concessions are appropriately targeted so that they can secure an adequate retirement income for Australians”.

So, what does Mr Morrison define as “adequate”?

He understands this is a long way from being an exact science but suggested one approach is to use income replacement rates – where retirement income is given as a percentage of pre-retirement earnings.

The Melbourne Mercer global Pension Index, for example, suggests a replacement rate of 70 per cent is a suitable level that someone on a median income should aim for.

Such measures are useful as a starting point but clearly a range of personal circumstances are major drivers of what is an adequate level of retirement income for you.

ASFA publishes indicative retirement income rates on its website for what it terms a “modest” retirement and a “comfortable” retirement level.

It estimates that an income of $34,200 will give a couple a “modest” retirement lifestyle, while those looking for a “comfortable” although by no means lavish lifestyle will need around $58,000 a year.

The debate over what is “adequate” is important because Mr Morrison has clearly signaled that the objective of the super system should not be for it to be used as an “open-ended savings vehicle for wealthy Australians to accumulate large balances in a tax-preferred environment”.

The government has committed to adopting a key recommendation of the Financial System Inquiry which will enshrine the objective of the super system into legislation. We should expect the delivery of retirement income to feature strongly in the super system’s objectives.

It will be a critical reference point as the various policy positions are debated through next year ahead of the next federal election.

For younger members of super funds the debate may well seem academic. For those people within a few years of retiring – along with those already retired – it will be of critical concern.

While the public policy debate will frame the broad issues of equity and sustainability for the system the challenge for individual fund members is to understand what their retirement adequacy level looks like.

That is where specialist advice that factors in your unique personal circumstances, potentially in combination with the age pension, can build out a retirement income plan will take an abstract, high-level policy debate and deliver it in a real-world way to your front door.

Then you can be the judge of whether “adequate” is a thing of beauty or an ugly set of numbers.

 

Have you ever seen a child standing tentatively at the edge of a swimming pool? She’s torn between her desire to join the gang in the water and her fear of diving in. In committing to the market, investors can be like that.

You can always find a reason for not investing. “Perhaps I should wait till after interest rates rise?” goes one line of the thinking. “Or maybe I should delay till there’s more clarity on China? Or hold back until after earnings season?”
Emotions and assumptions usually underlay this indecision. The emotion can be anxiety about “making a mistake” or fear of committing at “the wrong time” and suffering regret. The assumption is that there is a perfect time to invest.
Obviously, the ideal solution would be to enter the market just as it bottoms and exit the market right at the top.
But the reality is that precisely timing your exit and entry is close to impossible. If it were easy, millions would be doing it and getting very rich in the process. Instead, the only ones who tend to consistently make money out of market timing are those who write books about it.
The financial media certainly love market timing stories. For one thing, there is always some event or variable they can peg it to—like a decision on interest rates or upcoming earnings or a chart indicator. For another, the idea of timing the market is a powerful one and tends to get readers’ attention.
For example, one high-profile US forecaster in early 2012 predicted a 50-70% equity market decline over the following two-to-three years. It was to be a replay of the 2008-09 crisis, he said, but with an even deeper recession.1
That turned out to be a bad call. Global equity markets, as measured by the MSCI World Index, delivered a total positive return in Australian dollars of 93% from the end of 2011 to the end of 2014.2 In USD, it was 53%.
Others advocate more elaborate timing strategies. For instance, one recent academic paper suggested the stock market delivers better returns relative to Treasury bills in the second, fourth and sixth week after each of the US Federal Reserve’s policy-setting meetings in a given year.3
The idea here is that the Fed leaks information about its interest rate intentions in such a predictable way that, even without the information, savvy investors can make money by just buying stocks in certain periods.
While these theories can be fascinating, it is arguable how many of us have either the time or inclination to try them out. And even if we did, this does not take account of the costs of all the required trades or the possibility that as soon as we implemented the idea it would be arbitraged away.
So ahead of a central bank meeting, some would-be investors fret about whether they should hold off until they see how the market reacts. Others already invested worry whether they should take their money out.
The truth is that for long-term investors, these issues should be irrelevant. What matters is how their portfolios are structured and how they are tracking relative to their chosen goals. Markets will go up and down, security prices will change on news and it makes little sense to second guess them.
But while no one yet has come up with a consistently successful strategy for timing the market to perfection, there are some things that everyone can do to help ease the anxiety they feel about investing.
One is to realise that it does not have to be a choice between being 100% in the market and 100% outside. Ideally, an investor should stick to their strategic asset allocation—be it 70/30 or 60/40 or 50/50 equity/bonds.
Another is that this strategic allocation can be combined with periodic, disciplined rebalancing, in which the investor shifts assets from well performing asset classes to those less favoured. This is a good way of controlling risk without necessarily trying to time the market.
A third option is that there is nothing wrong with investors taking into account the returns they have already enjoyed and adjusting their asset allocations if they are on course to meet their goals. So, for example, for some investors it might make perfect sense to lock in returns after a good period and put the money into short-term fixed income if that meets their needs.
Yet another option is dollar-cost averaging. This is a method where an individual invests small amounts of an available pool of cash into the market over a period, rather than investing a lump sum in one go.
A useful contribution on this subject comes from Ken French, Professor of Finance at the Tuck School of Business at Dartmouth College. In his role as an academic, Professor French says the optimal decision is to invest it all at once. But while this might give an individual the best investment outcome, he says it might not be the best investment experience.4
This is because people tend to feel regret more strongly when it results from things they did do than from things they did not. So, for instance, it feels much more painful to buy stocks now and see the price go down than it is to neglect to buy stocks and the price goes up.
Professor French says that by dollar cost averaging, people can diversify their “acts of commission” (the stuff they did do) as opposed to their “acts of omission” (the stuff they didn’t do).
“The nice thing is that even if I put my finance professor hat back on, it’s really not that damaging to your long-term portfolio to just spread it out over three or four months,” he says. “So if you as an investor find that’s much more tolerable for you, you’re not really doing much harm.”
So, in summary, it’s always difficult to choose exactly the right time to get into or out of the market. For instance, it would have been nice to get out in late 2007 and back in around early March 2009.
But most mortals are unable to finesse it to that degree. The good news is that there are other options than just staying out of the market altogether and plunging back in.
These include maintaining a long-term strategic asset allocation in the first place, periodically rebalancing, taking money off the table if retirement goals are on track and dollar-cost averaging if that provides comfort.

Dramatic market swings, US Federal Reserve deliberations and discouraging data from China have made headlines in Australia and around the world in recent months. We asked Vanguard’s global chief economist, Joseph Davis, for his perspective.

Since the global financial crisis, economic growth in many developed countries has been modest, while share markets in New York and elsewhere have enjoyed a strong run (recent volatility notwithstanding). What explains the disconnect?

There have been two phases to the latest bull market, and that’s actually somewhat typical. The first phase is generally characterised by pessimism. The equity market just after the financial crisis was anticipating an even more sombre economic environment than perhaps the economics community was. Fundamental valuation measures for shares, such as price/earnings and price/book ratios, as well as dividend yields, were extremely low. So the market to some degree rises when the corporate sector outperforms these pessimistic expectations.

Certainly at Vanguard, we were saying that the global recovery was likely to be extremely muted, but our message was that the investment outlook could be much better than the economic one. That was in large part, again, because of valuations.

In the second phase, there’s an element of momentum and increased risk-taking. In the past two or three years, valuations have become stretched. In other words, the stock market has outperformed what the improvement in the economy might warrant. Stretched valuations, or what we’ve described as “froth” in some parts of the equity market, are why our outlook has become more guarded of late.

But even with recent volatility we’ve seen we wouldn’t characterise the financial markets as “cheap” by any means. Our long-term outlook remains guarded, but not bearish.

To be clear, we believe investors should continue to participate in the markets and stick with their asset allocations. Things could remain bumpy for some time, but that’s all the more reason to look through the volatility and stick with one’s investment plan.

China has long been the driver of global growth. Now it’s sputtering. What’s next?

The fact that growth in China is slowing isn’t news; it’s intentional. It’s part of Chinese policymakers’ longer-term plan, part of their rebalancing toward less investment and more consumption. Because the economy has been slowing for some time, the markets assumed China would be able to engineer a smooth deceleration – not a contraction, but a deceleration – with lower levels of investment offset to a good degree by increased consumption.

I think over a long period of time, that’s a very reasonable expectation. But there’s mounting evidence that China’s economy might be decelerating more sharply than expected and possibly even heading for a “hard landing.” Fears that the transition won’t necessarily be as smooth as some would hope is part of what the recent turmoil is about. The Chinese government’s target for GDP growth is roughly 7%, but the economy could actually be running at about 5% by our calculations, and the risk is that it might go even lower.

The markets were expecting that China, as part of its rebalancing, was going to have less real estate investment. But its slowdown in housing and other real estate sectors has been significantly underappreciated and, by our analysis, accounts for more than 75% of the slowdown in China’s economy since the global financial crisis. It’s unlikely we’ll see real estate investment reaccelerate in the short term given the overcapacity in manufacturing and in the housing market, particularly in certain Chinese cities. It’s also the case that Chinese policymakers don’t wish to return to the old business model of ramping up investment.

The prospect of a Chinese recession – an outright contraction in China’s GDP – linked to housing investment is not our baseline scenario, but it is the greatest risk we see for the global economy and the financial markets over the next year or two.

In the US, the Federal Reserve has been preparing the markets for an interest rate hike for more than two years. What will it mean when the Fed does finally act?

As to why it’s taken so long, I’d point to a number of factors. Growth has come in even weaker than the Federal Reserve expected. Core inflation – which excludes volatile food and energy prices – has come in below the Fed’s long-term target of 2% year-over-year for more than three years. And the unemployment rate has been above the Fed’s estimate for “full employment.” That backdrop explains a lot of why interest rates have remained close to zero.

When the Fed finally acts, I think the first rate increase or two should be welcomed as a vote of confidence on the resiliency of the US economy. Growth hasn’t been stellar, but it has clearly held up despite disappointing growth across most of the rest of the world. And it would be tough to look at the US labour market today and argue that interest rates should be at zero, the same place they were in 2009.

So conditions are appropriate for an interest rate “lift-off” but – as we have been saying to our shareholders for some time – more important than when it starts is where it stops. We expect to see a “dovish tightening,” with rates rising slowly and stopping at a level far lower than in some previous tightening cycles. We could see the US federal funds rate rising from crisis levels to roughly 1% over the next year or two, but with the Fed then setting the hurdle higher for further hikes – pinning them on the health of the US economy, global economic conditions and where inflation stands.

Economic news can be an endless source of fascination. But what role, if any, should it play in our investment decisions?

Any economic statistic that comes in differently from what was expected can influence the financial markets and the prices of one’s investments in the very short term – in fact, almost immediately. And you can see that with regularity, whether it’s a labour report, Chinese GDP or so forth. That’s understandable, because the financial markets are trying to price in or reflect economic risk in real time.

So growth coming in weaker or higher than expected, for example, may have implications for corporate earnings or the level of interest rates and can change the financial markets’ level of risk aversion. That’s natural. One actually does see, over very short periods, a high correlation between the surprise component of statistics and movements in the stock market.

However, I think what’s important – and what’s often lost if you focus on near-term economic news – is that, in many ways, those surprises wash out in the long term. What has much more impact on the performance of investments over longer periods are the trends in the economy and how the financial markets view those trends.

The 1980s and 1990s, for example, were arguably one of the strongest bull markets for both stocks and bonds. Was that because growth was consistently above expectations over the period? No. There were recessions, and we even had bear markets, including the 1987 crash.

What mattered were initial conditions – interest rates were very high and stock valuations very depressed – as well as long-term trends in the economy that would have been hard to identify in advance by looking solely at month-to-month statistics. Global disinflationary pressures led to a marked drop in interest rates and, hence, a bull market in bond prices.

We also had the fall of communism, increased globalisation, and the rise of certain technologies such as the internet spurring a rapid expansion of the global economy. Those factors, among others, arguably were significant contributors to the high rates of returns investors experienced over those two decades.
In the short term, there’s more noise than trend in economic statistics. To help separate the two, ask how a piece of economic news affects your long-term view on the outlook for growth and inflation. And, second, is that view markedly different from what the financial markets are now incorporating in the prices?

Only when both those questions are answered in the affirmative should investors even contemplate making any changes to their portfolios. And I can tell you, having spent 20 years in this business, that those occasions are rare.

There is one powerful, simple fact about the $140+ million wagered on this month’s Melbourne Cup that the investment industry can probably only dream of emulating. No matter how little – or how much – you decided to bet based on the horse/jockey/colour/lucky number, the one thing that was not in doubt was that you knew you risked losing the lot.

Indeed, the average punter on Australia’s most famous horse race probably expected to lose whatever bet they had placed. That is often seen as the price of being involved in a horse race that is a national – and increasingly international – celebration of the sport of kings.

A win, for most people, would make a good day better, while the loss would hopefully not be crippling.

Indeed the history-making win by Michelle Payne to become the first female jockey to ride the winner in a Melbourne Cup probably helped ease the short-term pain of those who had backed the short-priced favorites only to see them finish behind a local rank outsider.

Melbourne Cup punters understand that gambling is not investing.

However, at times investing can be akin to gambling, particularly if you do not understand the risks involved. The challenge for investors is that understanding the risks in a particular investment can be easier said than done.

This week, the chairman of ASIC, Greg Medcraft, spoke publicly about the challenges our securities regulator faces in ensuring that investors fully understand the risks they take when investing in complex and risky investment products.

Medcraft was speaking in the context of new powers that are proposed to be given to ASIC, following the recommendations by the Financial System Inquiry, which will allow the regulator to directly intervene where it sees products being mis-sold to investors.

The objective is to put more responsibility on product issuers for both the product’s design and how it is being sold. While the detail of those new powers is yet to be released the other side of the coin is communicating with investors in ways they can understand clearly what risk they are taking on.

Product disclosure statements take a lot longer to read and digest than the Melbourne Cup form guide. They are by their nature serious legal documents crafted carefully to ensure that product issuers are disclosing everything in accordance with the law. So it is hardly surprising they do not make for riveting bedtime reading. Nor is it surprising that many – if not most – investors simply do not read the PDS before investing.

Notwithstanding the new product intervention powers ASIC is expected to receive, Greg Medcraft has also challenged the industry to explore other ways to help investors improve their knowledge of the products they are considering investing in by using modern technology.

These days the rise of social media platforms like YouTube, Facebook, Twitter and LinkedIn has dramatically changed the way people not just access information but how they process and use it.

Vanguard participated in a pilot program in conjunction with ASIC to develop an electronic Key Facts Statement that potentially could replace a printed PDS.

It was developed for tablet application and incorporated video, audio and animated graphics. Also included was an investor self-assessment quiz to gauge different levels of understanding.
The goal was to understand if short-form disclosure could be engaging and effective. The results overall were positive with the clear message out of the consumer testing for the need to present information in the simplest format possible.

Information on costs and being able to access that information easily was of high importance to investors who took part in user testing. Content on risk and return also ranked highly on the importance scale but consumer understanding varied widely.

We’ve only just begun to explore how technology can help consumers understand the real costs and risks of investing, but it is clear that having simpler, more interactive and engaging product disclosure in place will help people avoid taking bets on their financial future.

It’s often said that the secret of success in any endeavour is “stickability”, your capacity for staying committed to a goal. But success also depends on having goals you can stick with. Managing that tension is what an advisor does.

Inspired by the impressive weight-loss of a work colleague, a portly middle-aged man decides to copy the program that gave his friend such results. It’s a crushing regime, involving zero carbs, 5am sprint sessions and mountain biking.

You can guess what happened. The aspiring dieter lasted about a week on the program before throwing it all in and returning to sedentary life, donuts and beer. It may have been better for this individual to get some advice first, starting slowly, swapping the mountain biking for brisk walks around the block and dumping the zero carb diet for light beer. He may not have shed weight as quickly as his friend, but he probably would have had a better chance of sticking with the plan in the longer term.

Similar principles apply with investment. You envy acquaintances who seem to have succeeded with high-risk strategies, but that doesn’t necessarily mean those are right for you. And in any case, their barbecue talk may leave out key information, like how they sit up all night watching the market and worrying.

Just as the want-to-be weight loser can’t live with 5am sprints, not everyone can stick with highly volatile investments that keep them up at night or that cause them to constantly second-guess themselves. And few people can do it without a trainer.

On the other hand, reaching a long-term goal like losing weight and building wealth requires accepting the possibility of pain and uncertainty in the short-term.

The trick is finding the right balance between your desire to satisfy your long-term aspirations and your ability to live with the discomfort in the here and now. Quite often, this tension can be managed through compromise. In other words, you can accept some temporary anxiety or you can moderate your goals.

The point is you have choices. And the role of a financial advisor is to help you understand what they are. So, for example, an advisor can assist you in clarifying your goals and setting priorities. Which is more important—the family holiday or the education fund? Perhaps you can do both by swapping the overseas resort for a camping holiday without dipping into the education fund.

It’s just like a personal trainer would be unlikely to recommend an out-of-shape sedentary business executive to start running marathons or try to halve his body weight in six months. The job of the trainer, or an advisor, is to manage your expectations and ensure the goals you are pursuing work with everything else you want to achieve in your life.

An advisor can also assess your capacity for taking risk. Not all of us are thrill seekers. And that’s perfectly OK. A portfolio that’s right for one person may be all wrong for another. That’s because each individual’s circumstances, risk appetites and goals are different. A financial plan shouldn’t be a cookie-cutter approach.

A third contribution an advisor can make is to help you manage through change. Our lives are not static. We change jobs, our incomes evolve, we take on new responsibilities like children and mortgages, we deal with aging parents, we move cities and countries. Nothing stays the same and a financial plan shouldn’t either.

So not only do different people have different goals, but each person’s own goals evolve in unique ways as they move through life. Reaching those goals requires a detailed and realistic plan, plus a commitment to stay with it. Some people may be up for the triathlon when they’re young and fit. But in later years, they might just need a more conservative program of stretching and walking.

You can try doing this on your own, of course. But it makes it easier if you have someone to keep you focused, keep you disciplined and help you change course when the circumstances of life require it.

Now that’s stickability.

It’s been called the greatest Grand Final in rugby league history. But the greatest moments were squeezed into a matter of seconds at the end. There’s a lesson here for investors impatient at poor market performance.

The North Queensland Cowboys, led by the inspirational Jonathan Thurston, stole a dramatic come-from-behind victory against fellow Queenslanders the Brisbane Broncos in the final moments of the 2015 NRL Grand Final on 4 October.

But just over six months earlier, near the beginning of a long season, the Cowboys had crashed to a humiliating 44-22 loss to the same team. Thurston’s team were “struggling for answers”, said media pundits, all but writing them off for the year.

For anyone despondently following the performance in recent years of the Australian equity market and of small and low relative-price stocks, in particular, the Cowboys’ experience in 2015 is a neat anecdote of how markets work.

Firstly, past performance tells us little about the future. In 2008, the year of the global financial crisis, the Australian equity market, as measured by the S&P/ASX 300 Accumulation index, fell nearly 39%. A year later, the market rebounded 38%.¹

Among low-relative price stocks, the contrast was even more dramatic. In 2008, the Fama/French Australia Value Index, a barometer of that part of the market, fell 45%. The following year, it rebounded 43%.

In small company stocks, too, the turnaround was emphatic. The Dimensional Australia Small Index, a proxy for low market capitalisation stocks, fell nearly 50% in 2008, only to bounce back by nearly 66% in 2009.

But market premiums, just like rugby league teams, don’t always turn around so quickly. Indeed, realised premiums can be negative for several years in a row, as we have seen recently with low-relative price and small company stocks in Australia.

The temptation in these circumstances, to use the sporting analogy, is to get out of your seat for a while and come back when things look more “hopeful”.

But there’s no evidence that you can reliably time these premiums in the short-term. That’s because they are unpredictable and can come in short and significant bursts, just like in football. The Broncos were winning 16-12. But with seconds to spare, the Cowboys came back with a try and a drop goal in extra time to win it 17-16.

This isn’t to imply that a market turnaround is impending. But it does mean that changing your portfolio based on forecasts, instead of on your own risk tolerance, goals and needs, is a hazardous business. (Dimensional researcher Jim Davis has a detailed study on the perils of short-term tactical asset allocation here).

After their early season capitulation against the Broncos, the Cowboys were at long-odds of getting into the top eight by the end of the regular season, never mind reaching and beating the same team in the Grand Final.

The market, size and value premiums are like that, too. When they’re negative, it can test the patience of investors. We’re tempted to give up, switch channels or watch another game where the outcome seems more predictable.

But becoming a rugby league champion is a long-term grind. And success may only be finally determined in a very brief window.

As an investor, you need to take a similar approach. Stay the full “81 minutes”.

We have long read and heard tales of retirees taking much of their super as a lump sum and rapidly spending all of the money on improving their immediate lifestyles – only to fall back on the age pension.

Such stories have gained increasing attention of late given the prevailing widespread discussions about the future direction of Australia’s super system and in the wake of the latest Federal Budget. (See The super agenda for change, Smart Investing, June 9.)

Yet actuary Michael Rice firmly rejects any suggestions that a large proportion of superannuation retirement benefits are withdrawn from the super system upon retirement and quickly spent.

In a recent opinion piece, Superannuation Myths Unbundled, Rice points to research by Rice Warner Actuaries showing that about 85 per cent of the value of all superannuation retirement benefits in dollar terms are invested in super pensions.

Only about 9 per cent of retirement assets in dollar terms were taken as a full lump sum in 2013-14 while the remainder was taken as a partial lump sum.

And at least a third of the money taken as lump sums was “invested in bank term deposits, which is a form of savings, and most of the rest was used to for debt reduction, which is also a form of savings”, Rice adds.

And interestingly, he forecasts that 96 per cent all retirement benefits will be taken as an income stream by 2025 as the superannuation system matures.

Part of the reasoning for this forecast is that members will be more inclined to keep their savings in the concessionally-taxed super system through retirement once their balances have grown to more significant amounts. Also, more retirees are likely to leave their savings in super as their level of financial understanding grows.

Some of the confusion about just how much super is being paid out in lump sums would be due to how the statistics are interpreted or misinterpreted.

According to Rice Warner research, almost 60 per cent of superannuation accounts at the time of retirement in 2013-14 had their balances withdrawn as a lump sum or partial lump sum. Yet, as discussed, almost 85 per cent of the retirement benefits are in dollar terms. This shows that many low-balance members are taking lump sums.

Most of us will eventually face the critical personal finance issue of whether to take our super benefits as a lump sum, a superannuation pension or a combination of both.

Ideally, super fund members will address this matter long before their intended date of retirement as it is likely to have a significant impact on their savings patterns before retirement and on their standard of living during retirement.

One of the critical ways that a good financial planner can provide guidance relates to assessing the client’s retirement benefits given their particular circumstance and then creating a plan on how to invest in retirement.

A regular superannuation pension – often supplementing an age pension – can make, of course, a significant difference to a retiree’s standard of living.

And from a tax perspective, super fund assets backing the payment of a superannuation pension are currently not subject to tax. Further, pensions (and lump sums) payments received by members aged over 60 are not taxed.

Another consideration for retirees is that the personal tax-free threshold of $18,200 for individuals means that a couple can hold relatively valuable portfolio outside super before being liable for tax. (This is aside from the Senior and Pensioner Tax Offset if eligible.)

Indeed, many retirees choose to hold their retirement savings inside and outside super if appropriate for their circumstances. There is much to think about and to discuss with an adviser.

When considering taking a career break, we would tend to focus from a money perspective on the loss of income and probably much less on the impact on our ability to save for retirement.

In short, leaving the workforce for a period – perhaps to raise a family or help care for an elderly parent – affects our compulsory and voluntary super contributions.  

It could be said that the impact on our savings capacity is the hidden or less-obvious financial cost of taking time out from the workforce for family reasons.

MoneySmart, ASIC’s personal finance website, has a useful and timely personal finance tool called a Career break calculator, designed to crunch the numbers on the cost to savings of a career break, given an individual’s personal circumstances. These circumstances include current income, current savings pattern and intended length of time out of the workforce.

The ageing of Australia’s population and increasing longevity will no doubt lead to more adult children – many of whom would be nearing retirement age themselves – leaving paid work for a time to care for very elderly parents.

Not surprisingly, research papers from the Association of Superannuation Funds of Australia (ASFA), Rice Warner Actuaries and Vanguard, among others, name interrupted working lives among the prime reasons why women have lower average super savings than men.

Another critical reason why women have lower average savings than men is, of course, that their average incomes are lower. See Super’s gender gap: the ‘gendermomics’ of retirement savings, Smart Investing, October 2014.)

An ASFA research paper, An update on the level and distribution of retirement savings (PDF), published in March, suggests that average super balance of men at the time of their retirement in 2011-12 was 88 per cent higher than the average balance of women in 2011-12.

Fortunately, there are ways to try to minimise the impact of a career break on your long-term savings that a financial planner can explain in detail, taking your circumstances into consideration.

For instance, the making higher voluntary super contributions within the contribution caps if possible in the years before taking time out of the workforce can provide a valuable savings buffer for when your salary stops flowing. (MoneySmart’s calculator provides an option to take such higher contributions into account in its calculations.)

Perhaps, an opportunity may arise – again allowed for in MoneySmart’s calculator – to make larger lump sum contributions, perhaps from an inheritance or asset sale into super.

Another way to plan to build up retirement savings is to consider retiring permanently at a later date than initially envisaged. (This is also addressed in the calculator.)

There is a strategy to keep contributing to super during a career break by practising contribution splitting between spouses. This involves a spouse still working directly some or his or her concessional contributions (compulsory, salary-sacrificed and personally-deductible) into the super account of a spouse who is taking time out of a career.

Super fund members can ask their super funds to transfer up to 85 per cent of their concessional contributions into a spouse’s super account – whether or not the spouse is in the workforce.

When facing an interrupted working life, it is crucial not to overlook the possible impact on retirement savings – and to try to do something about it.