How Superannuation Funds Invest Your Money
Background
Many Australian’s fail to understand the importance behind the investment options within their superannuation fund. Changing your investment style will simply depend on how much risk you are willing to take. However, more factors should be considered when making this decision.
Types of Investment Strategies
Firstly, lets get a glimpse of how super funds invest your money and the different types of investment strategies that you can ultimately choose.
Whether you are working hard, or sitting on a beach somewhere, your superannuation funds are being accumulated and invested based on your risk profile every day. These investments can include Australian or international direct shares, managed funds, property, fixed interest, exchanged traded funds and other investments. The risk taken in investing in these asset classes depend on the style of investments you choose to put yourself in.
- Conservative
This will comprise mainly of 30% in shares and property, with the remainder in defensive assets such as cash and fixed interest. - Balanced
Aims for a reasonable return, with 70% in shares and property and 30% in cash and fixed interest - Growth
This aims for high returns in the long term. With around 85% of the investments within high growth asset classes, such as shares and property, there is minimal investment in defensive assets.
There are also some funds that allow you to choose your specific asset allocation, and investment options and customize it to your risk tolerance
Choosing your suitable investment option needs to be heavily considered based on a range of factors. These considerations can include your age, income, your risk tolerance, how long until you are able to access these funds and your specific goals and required income you want to receive upon retirement.
Historically, in the long run, there are more likely to be more ups, than downs, in which would favour the growth option, giving the investment time to overcome periods of declining returns. However, in the short term, the growth option would cause steeper losses in periods of declines and vise versa in periods of growth. Thus, this needs to be considered when choosing your investment style.
Case Example
Paul is 35 years old and has accumulated his superannuation for the past 12 years while working full-time. He has been put in the default balanced investment option, which has performed reasonably over the period. If Paul was reasonably happy to take on risks (considering his age and the long period before he retires), Paul should consider a more aggressive approach for his superannuation investments, leaning towards the growth option. However, this still will depend on other factors such as dependents, income, employment status and other personal circumstances.
Conclusion
If you require more information regarding investments within your superannuation accounts, contact a financial professional to assist you.