What Is Share Market Volatility and How Does It Affect Your Super?

What Is Volatility?

Volatility refers to how much and how quickly the price of an asset or market moves up or down. High volatility means large price swings in a short period; low volatility means steadier, more predictable prices. Volatility is a normal part of investing and is not the same as risk — a volatile market can go up as well as down.

How Volatility Affects Your Super Balance

Most super funds offer a range of investment options with different levels of exposure to growth assets like shares and property. If you are invested in a high-growth or balanced option, your super balance will rise and fall with the share market. During periods of high volatility, it is common to see your balance drop noticeably. This can be unsettling, but for most people, the best approach is to stay invested and avoid making panicked changes.

Different Stages of Life, Different Approaches

If you are young and decades away from retirement, short-term volatility has little long-term impact because you have time for the market to recover. If you are close to retirement, a sharp market downturn can have a more significant effect, especially if you need to access your savings soon. This is why many advisers recommend gradually shifting to more defensive investments (bonds, cash) as you approach retirement — a strategy known as a glide path.

What to Check in Your SOA

Your Statement of Advice should clearly explain the investment strategy recommended for your super, including the level of exposure to growth assets and how volatility is managed. If you are approaching retirement, your SOA should address sequencing risk — the risk that a market downturn early in retirement significantly reduces the longevity of your savings. If this is missing from your SOA, it is worth discussing with your adviser.

Don't Make Emotional Decisions

The most common mistake investors make during volatile periods is selling when the market is down and buying back in after it has recovered — effectively locking in losses. If market volatility is causing you concern, speak to your adviser before making any changes. Your adviser should be able to explain whether your investment strategy remains appropriate or whether adjustments are needed based on your personal circumstances, not market noise.

Understanding Volatility in Your Super

Share market volatility refers to the rate and magnitude of price movements in financial markets. For super fund members, volatility is most visible in the investment return section of your statement — your balance can go up and down significantly from year to year, especially if you are invested in a growth-oriented option (high allocation to shares and property).

The key thing to understand is that volatility is not the same as risk. Risk is the chance of permanent capital loss; volatility is just the normal ups and downs along the way. Historically, Australian shares have delivered average annual returns of approximately 9-10% over the long term, but with significant volatility along the way — typically experiencing a correction (10%+ decline) every 2-3 years and a bear market (20%+ decline) every 5-8 years.

How Different Investment Options Handle Volatility

Super funds typically offer a range of investment options with different levels of volatility. A "high growth" option (90-100% growth assets) will experience the most volatility but has the highest long-term return potential. A "balanced" option (60-80% growth assets) offers moderate volatility with reasonable returns. A "conservative" option (30-50% growth assets) has lower volatility but lower long-term returns. Cash and fixed interest options have minimal volatility but very low returns.

As you approach retirement, many super funds automatically shift your balance to more conservative options through a "lifecycle" or "MySuper" default strategy. This is designed to reduce volatility as you get closer to accessing your super. However, this automatic derisking may not suit everyone — some retirees maintain growth exposure to ensure their super lasts through a 25-30 year retirement.

What to Do During Market Volatility

The most important rule during periods of high volatility is to avoid making emotional decisions. Switching your super to cash after a market downturn locks in losses and means you miss the subsequent recovery. Historical data shows that the best approach is to stay invested and, if possible, continue making regular contributions which buy units at lower prices (dollar-cost averaging).

If you are concerned about volatility, review your investment strategy rather than making reactive switches. Ask your adviser whether your current investment option aligns with your risk tolerance and time horizon. If you have more than 10 years until retirement, a balanced or growth option is generally appropriate. If you are retired or close to retirement, ensure you have sufficient cash and defensive assets to cover 2-3 years of living expenses so you are not forced to sell growth assets during a market downturn.

Frequently Asked Questions

Should I change my super investment option when markets are volatile?
Generally, no. Making investment changes based on short-term market movements is a common behavioural mistake. Review your investment strategy in calm market conditions based on your long-term goals and risk tolerance, not in response to market news. If you are constantly worried about volatility, you may be in a too-growth-oriented option.

How much volatility should I expect in a balanced super option?
A balanced super option (60-80% growth assets) can be expected to experience declines of 10-15% in a typical bear market, and potentially 20-25% in a severe downturn like the GFC (2008) or COVID-19 (2020). However, these declines have historically been recovered within 2-4 years.

What is the impact of fees on volatility?
Fees do not cause volatility, but they magnify its impact because fees are deducted regardless of investment performance. A fund with high fees means your net return after fees is lower, reducing your ability to recover from market downturns. This is one reason low-fee funds tend to outperform high-fee funds over the long term.

Does volatility affect super pensions differently than accumulation?
Yes. In pension phase, you are drawing down your balance while it remains invested. If markets fall significantly, your remaining balance is further reduced by withdrawals. This is called "sequencing risk." Having 2-3 years of cash reserves in your pension account can help manage this risk by allowing you to draw from cash rather than selling growth assets during down markets.