Should you take greater risk to earn a greater return on your super?
Given recent strength in Australia’s property and sharemarket, many Australians wonder why the well-paid experts managing their superannuation money can’t do better than an average return of about 7 per cent. (According to Super Ratings, the median balanced option returned 7.3 per cent across 2016).
Super funds can work in different ways, but often they’ll:
- default to a ‘balanced’ option
- have the investment mix automatically adjust as you get older, such as ANZ Smart Choice Super’s life stage funds
- let you choose your own investment mix, which we explore here.
Low risk equals low return
So what are the right areas to invest your super money? Right now, the experts say investing in cash is a no-no.
“Considering interest rates of 1.5 per cent to 2 per cent, people aren’t making any real return on cash once inflation is factored in,” notes Pitcher Partners wealth management director David Lane. “I’d suggest people have some exposure to the share and property markets.”
Financial adviser Bruce Brammall concurs, adding that Australian and other sharemarkets have seen strong growth in recent years, which many expect could continue.
“Let’s say you’re a 30-year-old with $80,000 in your super account. I’d be relaxed about recommending you aim to maximise growth through exposure to Australian and international shares and property,” Brammall says.
“If you’re 60 and have $600,000 you’ve spent a lifetime accumulating, I’m going to suggest a conservative approach. During the global financial crisis it wasn’t uncommon for those with heavy sharemarket exposure to see their super balance drop from $600,000 to $400,000. Those able to hang in there over the last nine years would have regained most of the money they lost but imagine what happened to those who were retiring in 2009?”
Lane says there are two factors super policyholders need to consider when deciding which option to take – their age and risk appetite.
“People are generally more aggressive when younger and become more conservative as their super balance grows and retirement looms,” he says. “Of course, a proportion of young policyholders will be conservative and a proportion of older retirees will be willing to take risks. It’s about being happy with the choice you’ve made and being able to sleep at night.”
You may be thinking the smart play is to invest in share and property markets when they are booming, then switch to fixed-interest investments when the party looks like ending.
“The problem with that approach is getting your timing right,” Brammall observes. “As we saw in 2008, markets can turn extremely quickly and nastily.”
Scrutinising your super
How often you should check your super investments largely comes down to how much money you’ve got in there.
“There’s not much point to a 20-something with $40,000 constantly checking to see if they’re up or down a couple of per cent,” says Brammall. “But I would recommend people of all ages regularly check their employer is making the contributions they should be.”
“I’d suggest those with large balances or who are nearing retirement review their super quarterly and everyone else do it at least once a year,” says Lane. “It’s now easy to visit your super fund’s website and check your balance. While you’re on the site, you should also be able to switch to a different investment strategy if you believe it’s a good time to increase or decrease your exposure to share and property markets.”
CASE STUDY: Why Daniel opted for high-growth
Transferring his super into a high-risk, high-growth fund has resulted in Millennial entrepreneur Daniel Battaglia doubling his balance in six years.
The 34-year-old University of Wollongong arts and commerce graduate spent six years working on contract in the banking sector before launching Parking Made Easy in 2012, an online platform which connects drivers with individuals who have car spaces to rent.
Prior to altering his investment mix, Battaglia consolidated a string of super accounts accumulated since he began working as a teenager.
“I used the ATO myGov online service to find out what I had and then transferred it all into one account,” Battaglia says. “I would have had accounts with half a dozen funds with a few hundred or thousand dollars in each, nothing exciting, mostly just from odd jobs and part-time work when I was younger.
“I amalgamated everything with one fund and then gave some thought to how I wanted it invested. Rather than going with the default, conservative investment option, I chose a leveraged fund, which means debt is added – the fund borrows money in order to increase its exposure to the shares it invests in.”
It’s a more adventurous choice than the steady-as-she-goes strategy of channelling the bulk of your super savings into fixed-interest investments with small but guaranteed returns. For folk in their 30s and 40s it makes sense to put it in the sharemarket and ride the ups and downs, Battaglia believes.
“The default option tends to be for super funds to invest around half in cash and fixed interest but for younger people who have a long time until retirement, that short-changes them a little bit,” he says.
“I was working in banking and finance when the GFC struck and I saw for myself what happened and how volatile the stockmarket can be. But generally, in the longer term, over 10, 20, 30, 40 years, the market rights itself, it rises again and it offers good returns.”
It’s a strategy which has worked for him.
“I’ve seen annualised returns of 17 per cent since 2011; growth which has seen my balance double,” he says. “It’s done really well; I’m pleased with the result.”
Case study by Sylvia Pennington.