Insights

From the Editor

From the editor: Market correction does not mean catastrophe

In recent weeks we have witnessed a rather significant share market correction both in the United States and Australia.

Naturally this is not a pleasant occurrence, but is sometimes a necessary phenomenon if markets are to be priced accurately. But the subsequent media coverage of these market falls always interests and frustrates me.

Without fail one of the headline stories at day’s end or the following day will be how millions of dollars were wiped off people’s superannuation accounts and how disastrous this is for the public at large. It really is the editor’s cry of “if it bleeds, it leads” in action.

The annoying part about it is often a dramatic correction is followed by a market bounce back, sometimes as soon as the next day. However, when this happens do we ever hear, see or read news reports to say millions of dollars returned to superannuants’ accounts? Of course not.

It’s deceitful reporting and is another element that is completely counterproductive to the pursuit of building confidence in the nation’s retirement savings system.

I’m probably preaching to the converted here because in the main SMSF trustees are more knowledgeable about investment matters, but one of the most misleading elements of this scaremongering is the lack of distinction between non-realised and realised gains and losses.

Sure the asset value of people’s superannuation share portfolios will have dropped, but they won’t have necessarily experienced a huge loss unless they sold all of the equities they own at the market’s lowest point on that particular day.

Similarly, any gains will not be banked or realised unless the shareholdings are sold perhaps at the peak of the market.

The situation shows certain sectors of the public don’t understand, or are potentially unwilling to understand, how markets work and the implications of fluctuations.

But there’s a little more at stake here. Misinformation disseminated to the members of the general public who don’t know any better means they might just believe these doomsday alerts and adopt a feeling of hopelessness when it comes to their superannuation – a poor result in anyone’s language.

Perhaps a more powerful, and less negative, message to broadcast during times of a market correction is the importance of diversification within any investment portfolio, including one for an SMSF.

It could be highlighted how diversifying into different asset classes mitigates the risk of suffering from a massive fall in the value of a portfolio on the back of a single market correction.

With regard to SMSF trustees, the instance of a market correction should make them appreciate the structure they have chosen to manage their retirement savings.

SMSFs are after all the most flexible superannuation structure in town. It means trustees have the ability to tailor the risk levels to which they want to expose their retirement savings.

Contrary to some criticism, it also means if there is a sector that could avoid any level of systemic risk due to a market correction, it has to be SMSFs because no two portfolios are the same.

But, of course, we’ll just about never see any reportage of that.

With concerns over the poor standard of financial literacy in general across the nation, the time has come for a more accurate portrayal of market movements and their consequences.

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