Superannuation is essential to our retirement planning, however, it’s not always given the attention it deserves. Unconsolidated accounts, unnecessary insurances and underperforming investment options can significantly erode your wealth in the long term, which is why super should never be a “set and forget” asset.

When it comes to Australians who are preparing for retirement, the last 5-10 years of planning can be as important as the previous 25.

Whether you’re in the accumulation phase or retirement phase of your financial life, it’s important to understand the diverse superannuation investment options available and evaluate which will help you to reach your financial goals.

In this article, we take a closer look at these options and outline how you can make informed decisions regarding your super.

Understanding asset classes

Your superannuation fund can invest your money in countless individual assets, however, these usually fall into four broad categories: cash, property, shares and fixed interest. It’s important to understand how each of these asset classes can affect the risk exposure of your superannuation, and how they interact to help you achieve your financial goals.

When you meet with one of our financial advisors, we complete a risk profile questionnaire with you which helps us to ascertain your tolerance to risk.

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Cash investments

Cash investments can be made up of cash, bank bills, term deposits, debentures and mortgages. This asset class can be a low-risk, ‘defensive’ option, and typically has a lower potential return than other asset types. This type of asset class provides income rather than capital growth.

Property investments

Your super can also be invested in property assets, such as commercial, retail and industrial buildings. It’s important to distinguish between property assets in your super fund and direct investments in property, which you may hold as part of your self managed super fund (SMSF). This asset class provides income and capital growth.

Share investments

Shares are a popular and diverse investment option, which can include listed shares on the Australian Securities Exchange (ASX) and overseas markets. Share investments can range from conservative assets to more speculative growth assets. This asset class provides income in the form of dividends and capital growth.

Fixed interest investments

Fixed interest investments pay a fixed interest rate until they mature. These can be government and non-government bonds in Australia and overseas, and high-yield loans. Fixed interest assets can be suited to medium-term investors who want capital stability and potential for greater returns than cash. This asset class provides income.

Your superannuation investment options

There is no one-size-fits-all approach to superannuation. The investment options you choose should reflect your individual risk tolerance, investing time frame, financial circumstances and retirement goals.

According to the Australian Government’s Productivity Commission, up to two thirds of new job entrants since 2005 have their super in the default option. While this may provide reasonable returns, it’s important to evaluate all of the investment options available to you, and consider how these can help you to reach your goals.

Let’s outline the core categories of superannuation investment options.

Managed funds

Managed funds are a popular super investment option, and often contain a range of asset classes designed to provide a “conservative”, “balanced” or “growth”-oriented portfolio. We’ll cover these pre-mixed investment options later in this article.

Sector-specific funds

As the name suggests, sector-specific funds can contain a range of investments within one asset class, such as international shares or Australian property.

Lifecycle funds

Lifecycle funds are superannuation options that adjust the portion of growth and defensive assets based on the member’s age. For example, somebody in the early stages of their accumulation may have a greater portion of growth assets in their lifecycle fund than somebody approaching retirement. Assumptions are made that the younger that you are the most tolerant to risk you are and the portfolios are structured accordingly.

Pre-mixed super investment options

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Pre-mixed options provide a simple way to tailor your super investments. Let’s look at the most common options available; growth, conservative, balanced and ethical.

Growth

Growth options aim for higher returns in the long term but can be more exposed to volatility than other categories. This investment mix usually contains a high proportion (around 80%) of shares or property assets.

People in the early stages of their super accumulation may find that a growth option is best-suited to their financial goals, as it provides a higher potential return over the long term.

Conservative

On the other end of the spectrum, conservative investment options provide a less volatile investment mix, with a heavier weighting in defensive assets like cash and fixed interest. This investment option reduces risk but accepts a lower potential return.

People in the pre-retirement phase of their financial lives may find that a conservative option meets their needs.

Balanced

Somewhere in between growth and conservative lies the balanced option, which aims to deliver reasonable returns with less risk exposure than growth options. Balanced options are often the default for super fund members.

Ethical

Ethical options have become increasingly popular in recent years, especially among young Australians. These aim to avoid investing in companies that don’t meet environmental and social standards, and can range from defensive to high-growth investments.

Which is right for you?

With a range of asset classes and investment mixes available, it can be hard to know which super investment option is right for you. Remember, there is no generic approach to superannuation that can be applied to everyone; the investment strategy that you select will depend on your personal goals and financial circumstances.

Consider the following three factors when evaluating your investment options.

1.  Your risk tolerance

Risk tolerance refers to your ability to manage volatility in your investments. For example, if you’re in a financial position where a significant downturn in the value of your portfolio won’t require you to sell assets for cash flow, you would have a high risk tolerance.

It’s important to note that risk tolerance can also be a product of your emotions, not just your finances. Some people are more emotionally comfortable with volatility if it means a greater potential return, while others would prefer to accept lesser returns if it meant avoiding the stresses associated with market ups and downs.

Talking with your financial advisor can be a great way to uncover what level of risk you’re willing to accept.

2.  Your expertise

Do you have specific knowledge of a certain market, industry sector or asset class? Some people choose to tailor their superannuation investments based on their expertise. For example, an investor with extensive professional experience in technology may feel comfortable investing in a technology sector-specific fund.

3.  Your retirement goals

The decisions you make regarding your super should always align with your overall retirement goals. Whether you’re planning to travel frequently, support grandchildren, or enjoy a transition to retirement phase, it’s important to consider how your super decisions now can empower you to reach your goals in the future.

Is it time to review your superannuation investments?

While you shouldn’t have a “set-and-forget” attitude towards your super, it’s also important to avoid any knee-jerk decisions that may damage your long-term performance.

For example, you may have read news of thousands of Australians moving their superannuation investments to cash assets due to the Coronavirus pandemic. While cash investments can be effective in protecting the short-term volatility of your super balance, many Australians would have “locked in” their losses by selling their share assets while the market was low.

Making rash, emotional decisions like these can significantly erode your wealth. On the other hand, considered and strategic investment choices that align with your financial goals can help you to get the most from your superannuation.

Speak to an advisor

An experienced financial advisor can be one of the greatest assets to your financial success. Not only do they understand your unique financial circumstances, but they can also recommend investment options that align with your risk tolerance, individual experience and retirement goals.

At Ulton, we understand the power of organised and experienced financial management. Whether you’re preparing for retirement or building your personal wealth, we know how personalised advice can empower you with a clear pathway to financial freedom.

To discuss how you can improve the performance of your superannuation investments, get in touch with the team at Ulton today.

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