Educating members on the dangers of holding too much of their retirement savings in cash will be a communication priority for superannuation funds in 2013.
Investors face the prospect of rapidly diminishing real returns on cash investments, with the official cash rate cut in early December and market expectations for two more rate cuts next year. Some economists believe the cash rate needs to fall another full percentage point to 2 per cent to stimulate the economy in 2013 as the first phase of the mining investment boom ends.
A 1.75 percentage point cut in the official cash rate since October 2011 - and subsequently lower rates on term deposits and online saving accounts - has done little to stem the flow of funds into cash. Sacrificing a decent real return for the benefit of capital preservation remains a common strategy for many investors.
But how long can it last if the cash rate continues to fall? And what is the permanent damage if too many investors allocate too much of their superannuation to cash, even though average life expectancies are rising and investors arguably need higher allocations to growth assets for longer?
With no end to global sharemarket volatility in sight, higher-than-usual cash allocations could remain for some time, especially if investors see cash as a surrogate for fixed income. Getting conservative investors who were burnt in the GFC to believe again in the power of equities is a huge communication challenge.
Superannuation funds need to further raise awareness of this issue, help ordinary investors better understand the long-term benefits of sensible asset allocation, and encourage them to have faith in their investment managers to choose an appropriate asset allocation for a particular stage of life.
That comment is not meant to criticise super funds on this issue. Many devote considerable resources to member communication and do an excellent job on investor education. But much more can be done to raise general awareness of the dangers of jumping in and out of asset classes, and trying to time markets.
For as a long as I can remember, most investment stories in newspapers and magazines have focused on stocks, funds, property and so on. Far fewer stories have educated readers on the benefits of asset allocation and helped the public understand the benefits of sound portfolio construction and maintenance.
The superannuation industry can show leadership on this issue and help hundreds of thousands of early retirees who are jeopardising their financial future by holding too much of their savings in cash. It is an issue that needs a collective industry effort, in addition to funds providing their own member education.
I have seen this problem first-hand. A semi-retired relative moved all her retirement savings into cash at the peak of GFC in 2008 and has kept it there ever since. She is fit and healthy and hopefully will need her retirement savings to last at least three or four decades. Fleeing the sharemarket for the safety of cash, at precisely the wrong time, will prove a disastrous investment decision. But, as with millions of investors, asset allocation is a foreign concept to her.
