Members who ease back on their voluntary contributions may be acting against their best long-term interests, depending upon their circumstances.
By adjusting their super contributions in reaction to share-market movements, super fund members are attempting a form of market-timing – that is attempting to pick the best times to invest or not invest. After all, even experienced market professionals rarely succeed consistently at market-timing.
The rewards of maintaining voluntary contributions throughout the ups and downs of markets include: continuing concessional tax treatment, compounding long-term returns, sticking to your long-term investment strategy and paying less for shares after prices have fallen.
And perhaps most importantly, members who keep up their voluntary contributions are taking a disciplined, non-emotional approach to investing.
Super fund members having contributions regularly paid into their diversified super accounts are practising a form of a disciplined investment strategy known as dollar-cost averaging.
Dollar-cost averaging simply involves investing the same amount of money into, say, shares or broadly-diversified managed funds at regular intervals over a long period – no matter whether market prices are up or down.
Under a dollar-cost averaging strategy, investors automatically buy more, say, shares when prices are lower and fewer when prices are higher. This averages the purchase prices over the total period that an investor keeps investing.
Yet the main attribute of dollar-cost averaging is not so much the price paid for securities. It is the adherence to that disciplined, non-emotional approach to investing that is not thrown off course by prevailing market sentiment and higher volatility.
Practising dollar-cost averaging through contributions provides a ready, easy-to-use means to make regular investments into the super portfolio of your choice. Simply inform your employer that you want to regularly make salary-sacrificed contributions.
Significantly, the tax benefits of salary-sacrificed contributions can help cushion your investments from the impact, on paper at least, of a downturn in market prices. This is because these so-called concessional contributions are made in pre-tax dollars and subject only to the standard 15 per cent contributions tax.
Yet the same amount of money invested outside super would have been first subject to pay-as-you go tax; typically meaning that less is left to invest. With more money initially invested, fund members are somewhat cushioned from a downturn in prices.
Keep in mind that most super fund members are investing in diversified portfolios. This diversification typically cushions a member’s super savings from the brunt of a turndown in share prices. And fund members can always choose, of course, to direct their new contributions into particular asset classes