TYPES OF INVESTMENT OPTIONS
Some people think of their superannuation as an asset – actually,
superannuation is made up of potentially many different assets.
Most super funds offer some sort of investment choice to members.
Put simply, investment choice is selecting the assets in which your
superannuation will be invested, such as Australian shares, international
shares, fixed interest, cash or property.
Asset classes like cash and fixed interest are sometimes described
as conservative investments. They carry less risk in terms of potential
volatility in returns and potential for capital loss, but they also
offer less potential for high returns. These investments are generally
described as low risk/low return.
Shares and property are generally described as growth investments
since they offer investors the potential for higher returns. But
this potential comes with higher risk. Returns could be volatile
in the short-term.
Investment options vary from fund to fund. Some super funds define
their investment options in terms of their risk characteristics,
such as strategies ranging from growth or aggressive through to
conservative or stable. Other funds offer more specialist options,
such as strategies that adopt a ‘socially responsible investment’
Some funds let members have greater control over selecting types
of underlying investments, such as choosing mostly shares. Other
funds let you blend options which use different investment techniques,
such as utilising alternative investments.
You don’t have to make an investment choice. But if you don't,
your money will be invested in the fund's default investment option.
This investment option may not necessarily be the most appropriate
option for you.
MAKING AN INVESTMENT
Which investment you choose will be influenced by your personal
views on ‘risk and return’. You might be quite prepared to risk
short-term losses for potentially higher long-term returns. Or you
might be quite risk averse and be more comfortable with less movement
in the value of your investment. Your tolerance to investment risk
is known as your ‘risk profile’.
One view about investing is when you're young you can afford to
take some risk with your investments, but once you get close to
retirement you need to become more conservative in your approach.
But this view is being challenged by increasing life expectancies.
At retirement age, people's money might need to last another 20
or 30 years, which is still a long-term ‘investment horizon’, so
it may not be appropriate to be too conservative.
Placing too much of your super into conservative investments, such
as cash, means you face lower risk than growth investments, such
as shares, but you may also miss out on opportunities for higher
returns. While you are contributing to super this means you could
end up with a smaller final superannuation balance. When you are
no longer making contributions and are retired, your investment
returns may not even keep pace with inflation, meaning in effect
your financial position goes backwards.
Your super fund will outline its investment approaches, the strategy
behind each, the return it aims for and the risks involved. Taking
the time to explore your investment options and making an informed
choice could result in a significant boost to your final superannuation
Take a look at the table below to see how much of a difference
even 2% in earnings can make over time. Remember, since superannuation
will be one of your biggest investments, it could be worthwhile
speaking with a financial adviser to help you choose investment
options which suit your circumstances.