Do you remember your last trip to Bunnings? You could’ve easily filled your trolley many times over with all the tools and products you’d need to build your own house.
And of course, anyone who’s watched a few episodes of Grand Designs knows there are plenty of people who do just that. But many more stick to the bits of DIY they know – like putting up a shelf or painting a bedroom – and leave the skilled work and heavy lifting to the professionals.
Building your own investment portfolio is somewhat similar. You can choose your own investments from the thousands of options on offer, then carefully craft your own portfolio. Or you can handle the parts you’re comfortable you can do well, then engage experts – such as the experienced fund managers at an Industry SuperFund – to do the rest.
There are pluses and minuses to either choice – what matters is that you’re confident the choice you make will deliver you the outcome you need.
The DIY versus expert choice we’re talking about is particularly important when it comes to your super, which forms the backbone of most Australians’ long-term savings plans.
These days, people can benefit from the tax advantages of the super system even after they retire. For example, an account-based pension created from your super balance can meet your need for regular income, with both the earnings of your invested super savings and your regular income payments being tax-free if you’re over 60.
Account-based pensions are a popular choice of retirees. You can read more about them here but in short, while you draw a regular income, the balance of your savings remain invested through your superannuation so it has the potential to keep growing, possibly making your money last longer.
That’s important when many people are worried about outliving their savings!
But whether you’re still working, coming up to retirement or already retired, you still need to make decisions about how you’d like your super to be invested, just as you would if you were investing in your own name outside the super system.
Gemma Pinnell, director of strategic engagement for Industry Super Australia, says that to make those decisions easier, superfunds have a broad range of investment types available and the flexibility for you to decide how much involvement you’d like to have choosing your investments.
“With an Industry SuperFund, you can choose between a wide range of pre-mixed investment options, from conservative right through to higher risk, that are created by the fund’s investment experts,” she says. “You might recognise these as balanced, growth, conservative, or a range of other mixes your fund offers.”
That flexibility means you can choose an investment approach that meets your needs, such as balanced (the popular balanced investment option typically means 60-70 per cent of your savings are invested in equities or property-related assets and 30-40 per cent in cash and fixed income). Or if you want to take a more hands-on approach, you could, ‘mix and match’ a number of investment options.
“Some Industry SuperFunds also offer a ‘member direct’ facility that allows you to create your own portfolio from a menu of Australia’s leading ASX companies, property trusts, listed investment companies and exchange-traded funds,” Pinnell adds.
But remember that going down the self-selected road is a bit like building a house yourself. You need to make sure that you’re building a house you’ll be happy to live in! If you’re not sure, it’s always safer to hire a professional.
Some workers and retirees choose to have additional investments outside the super system, or even to hold all their investments outside of super, other than the Super Guarantee contributions paid by their employer.
This may be because they believe they have greater investment expertise than is available from their super fund’s expert fund managers or because they prefer to have greater control over which investments they hold. They might also wish to invest in options that aren’t available in super.
If you’re still in the workforce and have met the eligibility criteria, you might even be considering taking advantage of the Covid-19 emergency withdrawal rules and withdrawing funds from super to invest yourself.
But before you decide to go it alone and start building an investment portfolio outside superannuation, there are some pitfalls you should be aware of.
Not least of these is that you need to be able to keep your nerve when securities markets are particularly turbulent, as any investor will be painfully aware occurred during the height of Covid-19 in early 2020. Panic-selling assets during market plunges crystallises your losses so unless you’re confident you can make clear-headed decisions in times of financial stress, it may be better to leave exchange-traded securities to the professionals.
Another important consideration for a DIY investor is to ensure your investment portfolio is diversified. To ensure diversification – in other words, not putting all their eggs in one asset basket – professional investment managers invest in a wide range of asset classes, including cash, bonds, shares and property, in both Australian and international markets. And that’s at the most basic level!
If you’re looking to invest outside of super, you can easily get exposure to cash and fixed interest investments by using a bank account and term deposits.
But when you consider investing in shares (in Australia and overseas) things quickly become more complicated – and expensive. To reduce risk, you’d need to invest in a number of companies, across a number of market sectors. Each time you make a transaction involving the purchase or sale of equities, you’ll incur brokerage costs.
If you buy overseas shares, you may also need to manage a number of different currencies because you’ll be (hopefully) receiving dividends from your shares outside of Australia.
Meanwhile, it’s difficult for most investors to get a diversified property portfolio unless you familiarise yourself with listed or unlisted property or mortgage trusts, and if you’ve owned a house, you’ll know that the costs of buying and selling real estate are high.
Plus, if you seek professional financial advice to help guide your decision-making, that comes at a cost. Overall, maintaining an investment portfolio may prove expensive over the long term so it’s important to understand the likely costs before embarking on your DIY program.
If you’d prefer to keep your investing life simple, you could get exposure to all of the major asset classes by keeping your savings in super and allowing your fund’s investment experts to do the work for you, for what is likely to be a much lower cost.
And if you’re thinking about making a Covid-19 super withdrawal to invest somewhere else, you need to do the sums. Are you likely to get better returns (after tax and expenses) than your super fund can give you? Are you able to get a diversified spread of investments so you’re not taking too much risk? And if the share market fell nearly 40 per cent, as it did earlier this year, how would you react?
Industry SuperFunds charge competitive fees that are generally lower than retail super funds to administer your savings. Some funds charge a low flat fee of as little as $1.50 per week, regardless of how large your super balance is. Conversely, most retail funds charge a percentage-based fee, so as your balance grows, you’ll pay more for the admin of your account.
Industry SuperFunds also offer lower investment fees than most retail super funds, and you can sometimes change your investment mix at no cost. (If you’re not sure whether your current super fund’s fees are fair, Industry SuperFunds has a handy online comparison tool that lets you see how your fund stacks up against the competition.)
The other important consideration when it comes to DIY investing is the potential tax implications.
If you invest in your own name outside the super system, any income from your investment will be assessed by the Australian Taxation Office (ATO). That means you’ll be liable for tax on both income and capital gains at your marginal rate.
Depending on your income, you could end up paying tax at the highest marginal rate of 45 cents in the dollar.
And although there are some concessions on capital gains (if you hold an asset such as shares or a property for at least 12 months, only half the gain is assessable), if you make a big profit, you’re likely to be facing a tax bill.
Pinnell says retirement income options such as account-based pensions can be a more tax-effective solution for many people.
“Super funds pay tax on the investment returns they generate at a maximum rate of 15 per cent,” she explains. “And if you choose an account-based pension when you retire, then there’s no tax at all, because both the earnings on your invested savings and your regular income payments are tax-free.”
That’s why some retirees choose to create their primary income stream from an account-based pension, then top up that income with returns from investments outside the super system.
“That way, you have the peace of mind of knowing that you’ll receive a regular income payment for as long as your super savings allow,” Pinnell says.
Past performance is not a reliable indicator of future performance and should never be the sole factor considered when selecting a fund.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.
An income stream provides regular payments during retirement while your balance remains invested. It's flexible and tax-free for retirees over 60 years of age.