A good time to invest?

What a sobering effect a year can have. This time last year we were in the full flush of a long-running bull market and a new superannuation regime was coming into play with the main focus for investors being how to get up to $1 million into super before the contribution window closed forever.

Markets since then have reminded us of two important lessons: first is that risk may lie dormant for extended periods but just like gravity it will punish people severely should they ignore some fundamental rules; the second is that tax is a major cost for investors and while there is no doubting the appeal of super on the tax front it deserves separate consideration to the underlying investments that your money ends up in.

We are about to enter the tax-driven super contribution season for this financial year and the question inevitably arises - "is now a good time to be investing?"

Super is a terrific framework for investing because of its long-term government mandated structure - you get the tax break by forsaking access to the funds until retirement. And that long-term horizon goes a long way to answering the investment question. For people with regular super contributions being deducted from monthly/fortnightly salaries they are effectively on auto-pilot on the contribution front and the only issue is whether to top up with more voluntary contributions.

But for small business owners super is often a once a year contribution decision - and the end of the tax year is a key driver. You can of course contribute through the super tax door and park the money in cash or conservative bond portfolios but is that really sensible for your superannuation.

When it comes to the timing question market history can also help give us some context. When you look back over the past 25 years there have only been two occasions when the Australian share market fell by more than 20% - 1981-82 and 1987-88.

So let us look at what has happened if you invested for a five-year period on the two occasions the market shed 20% in value.

Rational thought suggests it ought to be a good result given the long-term growth of markets - but the emotional challenge cannot be underestimated. This certainly qualifies as a test for all would-be contrarian investors because investing today is swimming firmly against the psychological tide.

Investors who took that plunge back in 1982 and 1987 were well rewarded. After the 1981-82 fall investors enjoyed annualised returns of 35.2% for the next five years. After 1987-88 the annual return over five years was a more modest return of 10.4% which is much more in line with long-term market averages and what realistically we should be both expecting and be satisfied with.

Now we are constantly reminded that past performance is not an indicator of future returns. The fact there have only been two 20+% falls in the past 25 years is noteworthy of itself and confirms we are living through a significant market correction.

No-one truly knows what future market returns will be but surely one lesson from the past 12 months is that when it comes to superannuation the 10-year view is the sensible perspective rather than trying to time markets in the tax-driven excitement of the run-up to the end of the financial year.