Stock exchange fear has hit the headlines in recent days, with scary reports highlighting market losses of “$100 billion” churning stomachs around the world.

Those reports might trigger clicks and paper sales for media companies, but it is vital that you stand back from the fray, keep a clear head and ensure you serve your best interests by acting sensibly.

Let’s look at what the markets have actually done first.

In Australia the All Ordinaries broad market indicator peaked at 8343.8 points on August 1 and on Friday, August 9 was trading at 7984.7 points – a decline of 4.41 per cent.

Over in the US the mighty S&P 500 index fell from 5667.2 on July 16 to 5319.3 on August 8 – a decline of 6.2 per cent.

Tech influence in US

The US market has fallen a bit more than the local equivalent because it is heavily influenced by the giant tech stocks like Apple, Meta, Google, Amazon and AI champion Nvidia which have been hit after strong run ups.

But at the end of the day those figures are by no means disastrous for super fund members.

“I spend a lot of time telling clients ‘don’t panic when it does happen because it is going to happen’,” said Wayne Leggett, director with Paramount Financial Solutions.

Volatility

So what Leggett is really saying is don’t be lulled into complacency by rising markets.

Rather be aware that volatility is always a factor and just because there has been a strong run up since weak points mid last year the good times don’t roll forever.

Also remember that for super fund members who have chosen balanced or growth options – the vast majority of members – diversification helps protect balances from wild sharemarket gyrations.

Balanced options typically hold between 61 and 80 per cent in growth assets with the rest in cash, fixed interest and unlisted products like infrastructure, property and private equity.

The country’s largest super fund, AustralianSuper, says its balanced option has about 55 per cent in local and international shares, with the rest in those other categories.

Balance needed

Consequently its funds have held up in the current market weakness.

Its balanced option is down 0.94 per cent for the financial year.

Its high-growth option, which has about 70 per cent in shares, is down 1.46 per cent.

Looking across the wider superannuation market, SuperRatings estimates that during July the median balanced fund made a positive return of 1.9 per cent while losing 2.1 per cent so far in August, leaving things line ball.

But remember to look back over time.

Long-term results

Last year those two allocations returned 8.46 per cent and 10.2 per cent respectively.

And over three, five and 10 years returns have been strongly positive despite the massive Covid slump experienced in 2020.

There are some telling figures to remember ,says Leggett. A decline in the sharemarket will typically lead to about half that fall recorded in superannuation held in a balanced fund because of the diversification effects mentioned above.

The other point to note is “often the worst thing you can do is act after the event. If you move out of the market into cash when it is down 20 per cent then you go back in it has to go up 25 per cent for you to get square”.

History shows not being emotionally and financially prepared exacts a heavy toll.

“The people who lose money are those who react, rather than do their investing by anticipating what markets will do,” Leggett said.

That doesn’t mean you have to have the instincts of investment legend Warren Buffett – just that you need to understand that every few years markets will take a dive.

That in turn allows you to be sure you have a diversified position you are confident can stay the course over time.

Economic outlook

Of course there are economic concerns underlying the market fluctuations.

In the US lower-than-expected employment numbers triggered concerns about a looming recession.

And in Australia weaker demand for resources coming out of a struggling China weighed in as drivers for pessimism.

Professor Mark Crosby from Monash University sees the worries as overblown.

“It’s a bit of an overreaction, but markets do that,” the economist said.

There has been volatility in US economic results for some time and political concerns have come into play as the US elections loom.

“No matter which candidate wins the presidency it is not going to make a massive difference in terms of the economic outlook for the next year or so,” Crosby said.

And for Australia, China may not boost infrastructure spending the way it has during recent economic difficulties.

“But is still predicted to grow at 4 or 5 per cent, so it’s still growing and is still a vibrant economy,” Crosby said.

The New Daily is owned by Industry Super Holdings