Thank you for downloading the Smart Investing podcast from index fund manager Vanguard Investments Australia, on the web at vanguard.com.au

This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Short-term returns a test of super faith

It was first published on Friday 30 September 2011

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

Volatility can test even a disciplined investor’s nerve.

It can also cloud and distort the journey you have been on.

In recent months the daily media has, understandably, often screamed out the fact that billions has been wiped off the value of the sharemarket after some roller-coaster days the market has delivered.

So if someone was to ask you this question: How has your super gone since the global financial crisis hit? How would you answer?

Some thoughtful research by Ross Clare, the director of research at the Association of Superannuation Funds of Australia (ASFA), helps provide some context for people perhaps questioning what is happening to their super fund.

New data from the Australian Bureau of Statistics Survey of Income and Housing conducted through 2009-10 has allowed ASFA to update and extend its analysis on the distribution of super assets across age groups for everyone above 15 years of age.

Besides giving us a measured perspective on how real world super accounts have fared the ASFA analysis also updated the picture on how the super system is travelling generally.

Average super balances in 2009-10 were up to $71,645 for men and $40,475 for women.  Now those average balances are clearly not adequate in terms of providing a significant retirement income stream and points to the fact that despite our super system being 20 years old it is still relatively immature in terms of coverage and adequacy for the general working population.

But there is a more positive story when you look at the super balances at the time of retirement - $198,000 for men and $112,600 for women. The most significant increase in those numbers is for women – in particular older women.

Returning to the question of how your super has fared in the two years leading up to the global financial crisis, the average super account earning rate was around 15%. That was followed by a negative 8% return in 2007-08 and a further negative return of 12.9% in 2008-09. In 2009-10 returns bounced back into positive territory with an average return of 10.5%.

According to the ASFA work that means that a super account without any additional contributions or withdrawals would have grown 6% by 30 June 2009 compared to where it started four years earlier.

Markets have delivered positive returns since June 30 2009 – although the first three months of this financial year has seen substantial volatility return and markets losing value.

But going back to the original question of how you would have scored your super fund – given that regular contributions cloud these sort of calculations when simply looking at your account balance – does growth of 6% sound acceptable?

Certainly by historical standards that is a relatively low rate of return but it was in the context of some of the largest negative annual investment returns we have seen for 40 years.

It also comes back to your time horizon. If you are not going to be depending on your retirement savings for another 20 or 30 years then should you be worrying about market volatility? Even people within sight of the retirement line can take solace from a time horizon of around 20 years.

When you look back over even relatively short time periods like five years it is clear that time is an investor’s ally because the longer the time horizon the greater the smoothing effect on market volatility.

The bottom line of the ASFA research is that average super balances continue to advance in the right direction despite some very challenging market conditions.

And that concludes the column

Short-term returns a test of super faith

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

To receive the column by email each week go to vanguard.com.au and register with Smart Investing.

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.