If you're young and still a while away from retirement, generally the best thing to do with your super before or during a recession is to leave it alone. If you've got your super in a balanced or growth fund (which the majority of Australians do), your super will already be diversified across a range of assets.
2 – It is highly likely your superannuation balance will return to where it once was. An economic recession is historically linked with a downturn in equities (shares) and the housing market. These are assets that most superannuation funds have a lot of money invested in.
Should I have my super in Cash? The Cash option has a very low risk level when measured over the short term. However, if you intend to stay invested in this option for a longer timeframe, you should consider whether the current low returns will be enough for your situation.
One way to make it easier to not sell during the next recession is to put a portion of your portfolio in low-volatility investments, such as bonds. The difference between shares and bonds is that with shares, you are part owner of a company, while a bond is a loan.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
Historically speaking, investors who hold on to their investments through recessions see their portfolios completely recover, and individuals who don't invest in the market at all lose out.
If you're young and still a while away from retirement, generally the best thing to do with your super before or during a recession is to leave it alone. If you've got your super in a balanced or growth fund (which the majority of Australians do), your super will already be diversified across a range of assets.
Your biggest risk in a recession is the loss of your job, if you're still employed or semi-employed. If you need to tap your savings for living expenses, a cash account is your best bet. Stocks tend to suffer in a recession, and you don't want to have to sell stocks in a falling market.
Single earners: Put aside 6 months or more
Recessions typically go hand in hand with higher unemployment, and finding a new job may not happen quickly. Catherine Valega, a CFP and wealth consultant at Green Bee Advisory in Winchester, Massachusetts, suggests keeping 12 to 24 months of expenses in cash.
The balance in your superannuation account generally rises over time as you accumulate contributions from your employer. However, super fees and changing investment performance can lead to dips in your super balance.
Think about how much investment risk you're comfortable with. A higher growth option will have higher risk and experience more volatile returns over the short term. But it will usually achieve higher returns over the long term. A conservative option will offer lower risk but lower returns over the long term.
Superannuation is primarily a long-term investment. Don't be too concerned about a negative month here or there because on average super funds have been providing positive returns for 25 of the last 31 financial years.
Your 401(k) can recover after a recession if you give it enough time to regain losses. Historically, the stock market has always recovered from recessions to eventually reach new highs. In fact, your 401(k) may begin to recover before the recession ends.
Investment-grade corporate bonds and government bonds such as US Treasurys have historically delivered higher returns during recessions than high-yield corporate bonds.
So how does inflation impact your superannuation? If inflation is at 2%, to maintain your spending habits, your super return must be at least 2% to keep up with your spending. Therefore, if your return is 8% per annum, your return, adjusted for inflation, is 6% per annum.
GOBankingRates consulted quite a few finance experts and asked them this question and they all said basically the same thing: You need three to six months' worth of living expenses in an easily accessible savings account. The exact amount of cash needed depends on one's income tier and cost of living.
Fixed-Income: Companies that issue bonds or other fixed-income securities may be negatively impacted by inflation because rising inflation can lead to higher interest rates, which can reduce the value of existing bonds and make new bonds less attractive to investors.
Higher interest rates that often coincide with the early stages of a recession provide an advantage to savers, while lower interest rates moving out of a recession can benefit homebuyers. Investors may be able to find bargains on assets that have decreased in price during a recession.
Australia could face per-capita (if not actual) recession
Throughout 2023, the panel expects economic growth of just 1.2% in the US and historically weak growth of 4.9% in China, suggesting Australia's biggest customer for minerals will be unable to provide much help as Australia's own economic growth dwindles.
What would a recession mean for Australia? If Australia enters a recession, many people will have a tough time, whether through job loss, home loss, or even just a struggle to pay the bills. Whole markets will tank or lose significant value and many businesses will likely go bankrupt.
In general, a recession lasts anywhere from six to 18 months. For example, the Great Recession that started in December 2007 lasted 18 months. But the recession prompted by the pandemic in 2020 only lasted two months. When a recession is on the horizon, it's impossible to know how long it will last.
Build up your emergency fund, pay off your high interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
So if you want to insulate yourself during a recession partly with stocks, consider investing in the healthcare, utilities and consumer goods sectors. People are still going to spend money on medical care, household items, electricity and food, regardless of the state of the economy.
If you don't have a healthy emergency savings account, you may want to prioritize that before you invest more during a crisis or recession. Setting aside funds for a financial hardship, such as a job loss, or temporary illness or disability, should be a high priority regardless of economic conditions.