‘Can I get insurance to protect my super against losing value?’

Q: I have money put aside in a superannuation account and at this stage it looks like it is growing steadily. However, I am very nervous about the possibility of the investment falling in value and me losing money? Is this possible?

Also, I have no insurance on my super plan? Should I have insurance and will this protect me from losing money if my super is invested poorly? I would ask the super account experts but they are looking after the interests of the company and I believe they will encourage insurance because it makes them more money, hence I am seeking an independent view.

A: These are good questions but the answer will depend on a number of important things. Many people are nervous about losing money in their superannuation accounts. The possibility of this happening will depend upon the type of investments in your superannuation account.

For example, the greater the exposure to Australian and international share markets and property or to alternative investments such as infrastructure, the greater the chance that you could experience a decline in the value of your superannuation account from time to time. Without knowing the type of ‘exposure’ you have in your superannuation account it is difficult for me to say much more about the propensity for you losing money, as you put it.

It is important to note, though, that while the value of your superannuation account can increase or decline from time to time, you will only ‘lose money’ if you change your investment approach at the wrong time. Often, people will change their investments once they see the value has declined.

Investment risk appetite

Often, this is the worst possible time to change things as the value will recover over time and the growth will continue. I suggest people take a long-term view with respect to their superannuation investments and not worry about the occasional decline in value, which will inevitably occur.

Notwithstanding this, it is important to note that when you are making longer-term investments, having some exposure to assets like Australian and international shares and property can be important in ensuring you get a reasonable investment return on your superannuation monies over time.

At present, if you invested all of your funds in investments where there is little or no risk of losing money (such as cash and fixed interest) the rate of investment return is exceptionally low (under 2 per cent) and this rate of growth is less than the rate of inflation.

In other words, while you would not be losing money, nor would you be making any money. Typically, without some exposure to shares and property, it is difficult to get any growth in your superannuation account over the longer term.

You say you have been getting steady growth recently and this probably indicates that you have some exposure to these types of risky assets. The most important question is – what is the right amount of exposure to risky type assets for each individual? The answer depends upon a whole range of issues such as, your age, the amount invested, your tolerance of risk (what’s known by some as your risk appetite), the return that you need to achieve your objectives and so on.

Because these are individual issues it is impossible to give more than general advice. If in doubt, you could seek advice from an independent financial advisor or from the superannuation fund where you have your money invested, however, your superannuation provider may not necessarily be able to offer independent financial advice – like whether you are with the right super fund!

Superannuation and insurance

In relation to insurance, this is another difficult question to answer without more information.

A good advisor would undertake what is called a ‘needs analysis’ to determine the correct amount of insurance (if any) that you need. Without undertaking this step, you cannot hope to figure out how much insurance is right for you.

Assuming you need some insurance, often the most cost-effective place to obtain it is through your superannuation fund. However, this is not always the case and once again this is a question that an independent financial adviser could help with.

If you have a question for Starts at 60’s money experts, email it to [email protected].