Q&A - Market turmoil, should I switch my super to cash? October 14th, 2022

At this point in time, that is a very difficult question to answer. The difficulty right now is, what happens next?

It is worth understanding some of the basic issues in play. In a sense, the United States calls the shots. That's partly because the $US is now the established international store of wealth. Forget gold, crypto etc; when the world faces financial instability, the flight to safety is the $US. It also explains why the $AUD has “tanked” compared to the $USD. It is not so much our currency is crashing, but the $USD is surging. That however, will ultimately have an impact on Australian inflation because so much of what we consume is imported.

What happens in the US economy whether we like it or not, has a world-wide impact. There's great uncertainty about the next few months.

Will the US go into recession? If the answer is yes, will it be severe? How high will US interest rates ultimately go, when will they ease? Each one of these issues has a significant impact on what people spend, company profitability, dividends and then share and other asset prices.

One thing’s for sure. The era of “cheap-money”, where interest rates have been extraordinarily low since the 2008 Global Financial Crisis, looks like it is probably over.

With so many variables in play at the moment, a whisper, a suggestion, a throw-away comment in a TV interview is enough to send the markets one way or another. And any one of these issues or rumours might prove to be true.

Could markets dive another 20 percent? Maybe.

Could they surge by 20 percent? Maybe.

Is there a "Factor X" in all this turmoil that might really rattle the markets and send them into a tail-spin? Maybe.

So what do I do?

The risk is trying to pick who's right or wrong and then realising you need to make the correct call twice; Switching out of markets to cash and then switching back in.

As we've seen, the market can surge 5 or 6 percent in a matter of hours. This could be a repeat of what happened 2 weeks ago. Maybe then, you were already in cash. If after that increase, you switched back into shares thinking the troubles were over, your values were smashed 5 days later, when additional economic data sent the markets back into free-fall. Do you switch back to cash now or wait? No-one knows.

The lesson in this is that the time to make these changes was when you could bank those profits earlier in the year. That was the time to "skim the cream". The turmoil we're experiencing right now is exactly why. If you keep an amount in cash to meet your ongoing expenses, typically a year or two’s worth, you'll have enough to carry you through until the inevitable recovery.

Equally, if you’ve recently come into some cash? Now might be the time to take a step back and access some of the excellent safe returns you can get from government backed bank accounts, some paying 4 percent or more. We expect those rates to rise soon too.

Above all, have faith that super funds generally invest in quality assets. Real company shares who in turn, own real assets making real profits. Shopping Centres and Factories with tenants and businesses. While the values may have dropped, the quality of the assets have not. They'll eventually come back up.

At Netplan, we’re committed to keeping you up to date with observations like this so you can make informed decisions about when to take those profits.