You may be missing out or taking unnecessary risks if you take a set-and-forget strategy to your super.
A lot can happen between the time you start your first job and the time you retire. From building a career, buying a home and raising a family to dealing with setbacks such as redundancy or divorce, life doesn’t stand still and neither should your investments.
It is likely that the investment choice you made at age 25 may no longer be appropriate at age 45 or 55. Or you may not have made an active choice, opting for your fund’s default option instead.
In most cases, the default option is a ‘balanced’ portfolio of growth and conservative assets. The mix of investments is chosen by the fund manager to suit the average fund member who might be anywhere from 18 to 65 years of age.
The problem with this approach is that we all have a slightly different appetite for risk and different financial circumstances. What’s more, these things are not set in stone but can and do change as you progress through life.
Check the menu
To help make sure your super suits your current needs, start by checking how your money is invested and then review this with what else is on the menu.
Nearly all super funds have a range of investment options for you to choose from. These vary according to the kinds of assets they hold, the amount of risk you are willing to take and the return you can expect to make in the long run.
Most funds offer a menu of single asset options, which you can mix and match to suit.
Most funds these days offer a menu of single asset options, such as Australian shares, international shares, sustainable shares, property and fixed interest, which you can mix and match to suit (fees may apply).
Alternatively, you can choose from a selection of ready-mixed options to suit different risk profiles. Different funds use different labels, but according to ASIC’s MoneySmart website there are four broad categories:
- Growth options typically hold around 85 per cent of their funds in shares and property with the balance in cash and fixed-interest investments. High growth options can have up to 100 per cent in shares and property. Average returns are higher over the long term – typically several percentage points above inflation – but the ride may be bumpy along the way. Losses tend to be higher in bad years and you can typically expect a loss in four or five years out of every 20.
- These options have around 70 per cent in low growth, low risk cash and fixed interest with the balance in shares and property. Average returns are lower than growth options over time but there is less risk of loss in any year.
- All money is invested in short-term deposits with Australian institutions which offer relatively low, stable returns and no risk of loss. The risk is that returns won’t keep pace with inflation.
- The balanced, or default, option may hold around 70 per cent of its investments in shares and property with the rest in cash, bonds and fixed interest. Average returns over the long run will be a little less than the growth option but higher than conservative and cash options.
A matter of time
The thing to remember about risk in investment, as in life, is that time can heal all wounds. If you have 20 or 30 years left to work and save, you can afford to take a little more risk than someone with less than 10 years until retirement. That’s because you have more time to recover from the swings and roundabouts of global investment markets.
Time can also eat away at your savings if you invest too conservatively because inflation reduces the buying power of money over time. So, anyone with at least 10 years to retirement should consider keeping a substantial portion of their retirement savings in a growth or balanced option.
The argument for reducing your investment risk grows stronger as you near retirement and have less time to recover from a market downturn. Even so, people entering retirement nowadays may still have up to 30 years to plan for. Depending on your appetite for risk, it may be appropriate to keep some money in growth assets to avoid depleting your capital too quickly.
Just because super is a long-term investment, it doesn’t mean it should be filed away in a drawer until you retire.
Given that many of tomorrow’s retirees can look forward to living well into their 90s, the reward for taking an active interest in your super is that your savings are more likely to last the distance.
Get great advice
As you can see, there’s lots to think about when deciding on your investment strategy. That’s why it makes sense to talk to a financial planner who can help you find the most suitable option for your individual financial situation.
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.