We all know the importance of saving for our retirement years and we all know that superannuation is the most popular and, for many, the most effective ‘investment vehicle’ for retirement saving. But how much do you know about your super ‘risk profile’ and whether it is right for you?
Most Australians have exposure to superannuation products simply because of the superannuation guarantee contributions employers make on behalf of their employees. In recent years more and more people are starting to take an interest in their superannuation, whether it’s in the accumulation phase or the payment/income stream phase. Consumers certainly took notice of their superannuation statements when investment markets fell in value due to the recent Global Financial Crisis. It prompted many to re-evaluate their investment portfolio with some choosing to withdraw their funds from superannuation completely without seeking professional advice. This resulted in some people withdrawing their funds from a vehicle that may have offered tax and social security advantages when in fact the real issue was the ‘asset allocation’ not matching their needs, objectives and risk profile.
The term ‘asset allocation’ is often used in the investment industry but is not always explained. Most commonly, it’s a term that applies to managed funds including unit trusts, superannuation funds and market linked income streams. In simple terms it refers to the type of assets (or investments) held in the fund. Unfortunately there are still investors who consider superannuation as a type of asset class but it is simply an investment vehicle. In most circumstances you are able to invest in the same assets within the superannuation environment as you can outside the superannuation environment.
While investors in managed superannuation funds cannot choose the specific investments within the fund, you can determine how aggressive or conservative an option you use. Investments held in managed funds generally fall into the five catergories:
Cash: Comprises underlying assets with fixed rates of return. They have no likelihood of capital growth and potential of capital loss is low. On-call accounts, cash management accounts/trusts, Bank Bills and term deposits are typical products in this sector. Cash is often used for short investment time frames often up to two or three years.
Fixed Interest: Assets in this sector include Government bonds, mortgage loans, longer term fixed term deposits, debentures and international fixed interest bonds. The duration of underlying assets is usually up to five years though some may be longer. Fixed interest is usually used for short to medium terms.
Property: Directly held assets include commercial, retail, industrial and sometimes rural real estate. Indirect assets include listed and unlisted property trusts. Property is generally considered a long term investment.
Australian Shares: Historically they offer opportunity for strong capital growth over the long term. The share market is, however, volatile and losses can occur if assets have to be sold when the market is down. Australian shares have the potential to offer strong returns over a long term.
International Shares: As with Australian shares, they are considered long-term investments. Investing offshore offers greater diversity due to access to larger markets. International shares are subject to other risk factors, such as currency fluctuation, that can affect the risk/return equation. Overseas shares have the potential to offer strong returns over a long term.
The higher risk investments have a longer suggested time frame. For example shares and property that can fluctuate in value are considered long-term investments and may offer higher returns. Products such as term deposits which fall into the asset class of cash have little risk, are considered short-term investments and generally pay lower returns. Superannuation providers often have a range of funds you can choose from that consist of either one or a combination of the asset classes listed above. They range from defensive and conservative funds to balanced funds through to growth or aggressive style funds. Generally the more aggressive the fund the more ‘growth’ style assets such as shares and property are held.
When considering a fund, it is important to choose one that suits your time frame, risk tolerance and objectives especially if you are retired or close to retiring. You should consider what you wish to achieve with the investment and how you will ultimately use the funds.
Any investment options you consider should suit your risk profile. Some people are quite comfortable to expose their funds to higher risk investments in order to get a higher return while others are more conservative and are only comfortable investing in more secure products. The task of identifying what type of investor you are, whether it be yourself or with a financial planner, involves prioritising what is most important to you. For example:
- Do you want to preserve your capital?
- Do you want returns to outpace inflation?
- Do you want tax effective investments?
- Do you want mainly growth or mainly income from your investment?
Answering these types of questions generally involves trading one off against another but it will certainly help with making the decision on what asset allocation is most appropriate.
NICRI suggests that when considering your needs and objectives and determining your risk profile you should discuss it with a professional financial planner and/or your superannuation fund. NICRI also has an online financial education tool known as Moneymap. Moneymap has useful tools such as a risk profiler to assist you in determining if your attitude towards investing will meet your objectives.
Prior to acting on information provided in NICRI articles, NICRI strongly recommends you confirm details in relation to your personal circumstances with a professional advisor and any relevant government department.
The National Information Centre on Retirement Investments Inc (NICRI) is an Australian Government funded, independent consumer agency providing information to the general public on investment products.
If you require further information on superannuation, income streams and financial planning issues please contact NICRI toll free on 1800 020110, email [email protected] or write to PO Box 1339, Fyshwick ACT 2609. NICRI’s information leaflets are also available on its websites www.nicri.org.au © and www.moneymap.nicri.org.au.