Property – medium to high risk depending on the assets and the proportion of listed property (which can be traded like shares) and direct property. A medium-term time horizon is desirable for the same reason as for shares.

Photo: Sandra Burn White

How is Your Super Invested?

Even if you are not an avid Do It Yourself Super Fund investor, it is still possible to have some control over how your super is invested. Choice of investment options within your fund should enable you to mix or diversify your portfolio to coincide with your “risk profile”, that is, how much risk you are prepared to accept for an expected return. Everyone has a different risk profile and this can change with age or projected time left in the workforce.

Retail and industry superannuation funds usually offer a wide range of investment options, but most members tend to remain within the default option. Whether this is done as a conscious choice or is a result of apathy is unknown. And it is unfortunate that many fund members believe that the default option is the safest option – this is definitely not the case as most funds would offer more conservative options.

Although the terminology varies and can cause problems, a mix of 70% growth assets and 30% defensive assets as a default position is common to many industry funds. Some funds may call this the “balanced” or “growth” while others may use terms such as “diversified” to describe the same mix of investments.

The main point is that there is a direct correlation between risk and return. This means that the higher the risk, the higher the potential return, but on the negative side, the greater the chance of a loss. It’s common sense! This is why even professional investors cannot accurately time the investment markets. The well known maxim, “Time in the markets, not timing the markets” means that prudent investors reap the benefit of compounding interest over periods of time and avoid knee-jerk reactions in times of market volatility.

So how do the most common asset classes sit in terms of risk and returns? Over 20 year periods the following hierarchy of asset classes and returns usually falls into this pattern:

Shares- high risk and potentially high returns. A longer time horizon is needed in order to avoid selling when markets are low. Expect occasional negative returns.

Property – medium to high risk depending on the assets and the proportion of listed property (which can be traded like shares) and direct property. A medium-term time horizon is desirable for the same reason as for shares.

Bonds: lower risk than the above categories but expect lower returns. And remember – Bonds can also produce negative returns! As you would expect, debt instruments are subject to interest rate changes.

Cash: the lowest risk category with the lowest return. Over the long term this asset class produces lower returns than shares, property and bonds, but it is secure.

Other investment classes which may be included in your superannuation portfolio include: private equity, infrastructure, hedge funds, absolute return funds and global macro funds. These assets increase diversity and clearly your returns will depend on the mix (asset allocation), the quality of the managers as well as market movements. More on these investment classes in a later Super Smart article!

So have a look at your fund’s annual report when you receive it this year and consider how your super is invested. And have a think about your risk profile to be sure you are invested in the right option(s) for your risk profile!

And good investing ...

Bernard O’Connor