Hands up if you don’t know where your super is invested? If that’s you, you’re not alone. Chances are, if you haven’t chosen an investment option then your money is invested in your super fund’s default option.
In most cases, the default option is a ‘balanced’ portfolio of growth and conservative assets. The mix of investments in these portfolios are chosen based on the fund strategy and objectives.
The problem with this approach is that we all have a slightly different appetite for risk and different financial circumstances. These things are not set in stone and can change as you move through different ages and stages of life. So while the balanced option may be just right for some people at a certain stage of life, it may not provide the best option for you.
To make sure your super suits your needs, start by checking which option you are currently in and then compare this with what else is on offer. Most super funds have a range of investment options which you can mix and match to suit. The main difference between these options is the amount of risk you are willing to take and the return you might expect in the long run.
While different funds use different labels, investment options generally fall into these categories:
- Growth. Around 85 per cent in shares and property with the rest in cash, bonds and other fixed-interest investments. High growth funds have up to 100 per cent in shares and property. Growth options aim for higher average returns over the long term, but the ride may be bumpier along the way. Losses tend to be higher in bad years and you can expect a loss in four or five years out of every 20.
- Conservative. These options have around 70 per cent in low growth, low risk cash, bonds and fixed interest, with the rest in shares and property. Average returns are a few percentage points less than growth options but there is less risk of a loss in any year.
- Cash. Money can be invested in deposits with Australian deposit-taking institutions which offer relatively low, stable returns and no risk of loss. There is, however, the risk that returns won’t keep pace with inflation.
- Balanced. Between 60 and 75 per cent is invested in shares and property with the rest in cash, bonds and fixed interest. This is the not-too-hot, not-too-cold option. Average returns should be a little less than the growth option and higher than the conservative and cash options.
While risk might sound like a bad thing, a reward for taking on more risk is the potential for higher returns. If you have 20 or 30 years left to work and save, you might afford to take a little more risk than someone with less than 10 years till retirement. That’s because you may have more time to recover from the swings and roundabouts of global investment markets.
So for a younger person, a growth or balanced option is more likely to provide higher returns over the long term albeit with a few bumps along the way than having your balance invested wholly in cash or defensive assets. Given that many of tomorrow’s retirees can look forward to living well into their 90s, a reward for taking a little more risk early in your working life is that your retirement savings are more likely to reap the benefits.
A financial adviser can help guide you through the options.
This information is current as at 19/05/2015
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.