So the stock market crashed and that’s where your super money is. So that’s bad right? No one seems very happy about this. The news is all about panic. Should I panic too?
No. And let’s explore why.
And some avocados can help.
The stock market is where shares of companies trade at different prices. Avocados also have a price that changes. Both are fundamentally, just assets with prices.
But, you are more used to avocado price changes, so let’s use them to make it easy to understand share market price changes.
If an avocado price falls from $5 to $1, are you happy or sad?
You are happy of course! But why exactly?
Because you are a buyer of avocados. Imagine the poor avocado farmer seeing the price fall from $5 to $1. The avocado farmer is the seller, and would be very upset.
So, avocados have taught us something.
It’s important to know if you are a buyer or a seller before you decide if a price fall is a good or bad thing for you.
Back to your superannuation money invested in the stock market. If the price of the stock market has fallen, all we need to do is work out if you are a buyer or seller.
If you are working and eligible for super, each quarter your employer will add money to your super account and the super fund will go out and purchase shares (and other assets) for you. You are a buyer. If you are young, you will be buying for a very long time. And now they are cheaper.
So, who are the sellers in superannuation?
Older people who are about to stop work are soon to be sellers of assets. They will withdraw money from super to live on. Their super fund will need to sell shares to give them their money.
If the stock market falls just as you are retiring, it is definitely a bad thing. That’s why as people get closer to retirement, they usually reduce their investments in high growth assets and move them to less volatile assets.
If you are young...
While the share markets are on a decline, as a buyer, you could benefit from these lower than average prices. And if you already have some avocados at home, if you get spooked and sell while prices are on the decline you could sell for a lower price. The best thing to do is to understand that the value will fluctuate and stay calm. Remember your goals and that superannuation is a long term investment, if you’re young you could have decades before you need to access your super, so you should stay calm.
Advanced avocado class
Ok - our analogy of just buyers vs sellers is helpful to reset your thinking about market falls, but it’s not 100% analogous. There is a third group - owners of avocados.
Imagine you bought a tray of avocados at $5 yesterday. You are an owner of avocados.
And if today the price fell to $1… yeah, you are not happy. Of course, if you need to buy another tray each week for the next few weeks, you’ll still be very happy (remember from above, buyers like when prices fall).
What about the existing tray? If your friend offered to buy it for a $1 right now, and you agreed, you have “crystallised the loss”. You have lost money.
But, if you decide to keep them a few days and they go back to $5 on Friday, you haven’t actually lost anything. So, if you are an owner, when you sell determines how much you make and whether a price fall was a good or bad thing for you.
Hopefully now you understand why older Australians are panicking about the stock market crash. They are owners of shares and are likely planning to be sellers soon.
For younger Australians, they likely own less shares and are likely to be buyers for many years to come.
Hope that was useful. See you in the supermarket.
For more information about our investment options, see our Investments page.
