Should I leave my super in indexed balanced full stop, or switch between cash when the market looks dicey?
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Switching from a balanced investment option to cash in a time of volatility with a view of timing financial markets is a common question especially when financial markets look gloomy.
The market timing decision is fraught with danger and many investors have attempted to time the market with a view of selling out to cash when financial markets fall with a view of buying back into the market at a future point when the outlook looks more settled with a view to gain when the market rises.
In reality, very few people including the professionals who can actually get this market timing decision right. The reason that market timing is so difficult is that you no one knows what will happen ‘tomorrow’ and you also need to get two market timing decisions right.
Firstly, you need to be able to determine when the appropriate time to switch to cash is and secondly determine the time when to re-enter and buy back into the market. Statistically, if you have a 50% chance of making the correct timing decision on when to buy and sell, you need to get both of those decisions right in order to gain from this marketing timing approach. On that basis of selling out when the market is high and looking dicey and buying back when the market looks more settled, statistically, you have a 25% chance of getting the market timing decision perfectly right. Aside from not knowing what will happen tomorrow or the next day, those odds aren’t in your favour and offers a low probability outcome.
A higher probability outcome and my preferred investment approach is to think about your goals and what you are wanting to achieve with your superannuation over the longer term and align your selected investment approach with your goals, time frame and within the level of tolerance, you can accept both in the good times and bad. There will be another future market event that causes volatility and falls, therefore these factors are important to get right so that you are best placed to manage those circumstances when they happen. Financial markets do not move in straight lines and that’s the reason why you are rewarded with a higher long-term return than cash. Albeit the ride is not a smooth one and a ride that not all of us are comfortable with.
Volatility in financial markets is fact of life and I believe it is prudent to set an investment strategy that you remain comfortable with and one that you can hold and stay the course with for the long term (10+ years).A balanced investment option for your superannuation may well be the right option for your superannuation or it may not. Once you are clear on what you are wanting to achieve, understand your time frames and risk tolerance only then will you be clear on what investment approach you should take. Working with a financial planner can help you work through these questions and help you make the most appropriate decision for your circumstances.
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