If you’re reading this, the chances are you’re pretty switched on when it comes to your superannuation and are interested in knowing whether you’ve picked the optimum investment type for your retirement requirements.
Many people – even those that understand the importance of contributing to super and monitoring the returns and fees it attracts – don’t give as much thought to how their money is actually invested. Nor how that investment strategy may perform under stress or how it can help them reach the income goals they’d set for their retirement.
Sound like an overstatement? Not so, if you look at the way many Australians treat their super savings.
Aussies have nearly $3 trillion invested in super funds, and a good quarter of that money is in MySuper accounts. MySuper accounts are where your money goes if you don’t nominate a specific super fund for it to be invested in or choose a specific investment option within your employer’s fund of choice.
MySuper investment options usually take what’s known as a ‘balanced’ approach to investing, which means they spread your super savings across a mix of growth assets (such as shares and property), as well as safer investments (such as cash and bonds).
A balanced investment option is also a popular choice for people who do take an interest in how their super is invested because it provides diversification, as we explain below.
Over the past decade, the balanced investment option has produced solid returns, with Industry SuperFunds leading the performance pack, ahead of the bank-owned retail funds.
Despite the financial turmoil of Covid-19, most balanced funds ended the 2019/20 financial year flat, with some of the better-performing funds posting positive returns according to SuperRatings, a leading super research house.
Take a longer view, and investors in most balanced funds – even the people in default funds, who don’t take much interest in their super – have been getting good returns. In fact, some of the best-performing balanced options over the 10 years to the end of June were industry super funds.
But the balanced option isn’t for everyone.
Some investment rules have stood the test of time, and diversification – or, in simple terms, not putting all your eggs in one basket – is one of them.
That’s where the balanced option can have the edge. Not only will your super fund invest across shares, property, cash and bonds (both local and international) and a growing number of alternative asset classes, but you’re also getting exposure to hundreds, if not thousands, of individual assets within those broad asset classes, such as shares in the ASX or ownership of a Sydney office building – you’re getting lots of baskets containing lots of eggs!
Having a diversified portfolio of investments, as is typical with a balanced investment option, is helpful when one investment or asset class drops in value, because the others typically remain stable or continue to grow. That’s why many investors, both inside and outside the super system, choose a balanced investment option for relatively stable, long-term growth of their capital.
But if you’re the type of person who simply can’t stand the thought of your investments falling in value at any time or if you’re comfortable enough with big swings in your investments’ value to shoot for even higher potential returns, it’s good to remember that there are options other than balanced that can be accessed within the super system.
If you’ve talked to a financial adviser or your super fund, you’ll probably have some understanding of what’s called your risk profile, risk tolerance or risk appetite – it’s a measure of how much risk you are prepared to take when you invest money in order to achieve returns.
If you’ve got a high risk profile, you’re a bit of a punter, and you might be comfortable having more of your money in, for example, the share market. If you’ve got a low risk profile, you’re likely to be comfortable in more conservative investments, such as cash.
As well as your risk appetite, it’s important to consider your longevity risk – in short, whether your investments will deliver the returns you need to sustain you through retirement. It’s common, for example, for younger investors to opt for higher-growth investment options because they have more years in which to make up for potential losses.
On the flipside, living too long is also a risk, so being prematurely conservative about your investments can also prove a problem. These are real considerations you should take into account when thinking about what income stream you may want to create in retirement and how your investment choices match that income requirement.
Gemma Pinnell, director of strategic engagement at Industry Super Australia, says understanding your personal risk profile and longevity risk is just one area where a professional adviser can help.
“Your Industry SuperFund has financial planners who can assist you with the big decision of what to do with your retirement savings, including which investment option is right for you,” she says. “Alternatively, researching individual funds and investment options yourself can be a great way to work out which one best suits your needs.”
Some investment veterans, meanwhile, swear by the simple ‘sleep test’. It’s an easy one – if your investments, or the risk of losing money on them, keep you awake at night, you’ve got the wrong investments.
If you’re interested in having more control over how your super is invested or considering an investment option other than balanced, many SuperFunds are well-designed for your needs.
Not only can your fund put you in touch with a financial planner who can guide you through the process, you have plenty of options to consider. And you can continue to change your investment choices right up to the point of retirement, usually at no cost if you’re with an Industry SuperFund, if your investment objectives or situation changes in the future.
There are investment options designed to suit the various risk profiles; as well as the balanced option, conservative and growth options are offered by all Industry SuperFunds. You can also choose investments by asset class or geography, and by specific type, such as ethical or sustainable investments.
Meanwhile, if you’re happy going it alone, you don’t even have to make a phone call to have your investment choices put into action.
“You can advise your fund to change your investment option or options at any time by simply completing and signing an online ‘change of investment choice’ form or downloading the form from your fund’s website,” Pinnell explains.
Even better, if you choose to create a retirement income stream by using an account-based pension, part of your super balance remains invested in your choice of assets, giving it the potential to grow over time*, even as you’re drawing down a regular income. Your investment horizon just got a whole lot longer!
*Past performance is not a reliable indicator of future performance and should never be the sole factor considered when selecting a fund.