Super is a long-term investment and super funds invest our money with the intention of growing our funds for the future. Many super funds offer a range of investment options you can choose from and what you choose will depend on how much risk you are willing to take. As an example, choosing a more conservative option will usually offer lower risk but also lower returns over the long run. Choosing a higher growth investment option will have a higher risk attached and may experience more volatility in the short term, however higher growth investment options usually deliver a higher return in the long run.
So how do you know what investment option is best suited for you?
While there are many options to choose from, you should be choosing the investment(s) that best suits your risk profile.
Most funds offer a ‘default’ investment option which you’ll go into if you don’t nominate an investment option. The default option is usually a balanced option that has a mix of defensive and growth assets.
The asset allocation can vary between options, here are some examples:
Growth: 85% of the investments are in shares, property or investments likely to have risk to the market which is sometimes call the ‘Growth’ component. Growth investments aim for a higher average return over the long term. This also means you could suffer a greater loss in years where the market does not perform well.
Balanced: 60-70% of the investments are in growth assets while the remainder is in more conservative options, including fixed interest and cash. Balanced investments aim for moderate returns which are usually less than the returns from a growth investment option. This reduces the risk of losses in poorly performing years.
Conservative: around 30% of the investments are in growth assets with the majority in more conservative options. Conservative investments are intended to reduce the risk of loss and therefore accept a lower return in the long run. Many retirees prefer a more conservative investment allocation as they may be unable to recover from a downturn in the market.
Cash: 100% of the investment is in deposits with Australian deposit-taking institutions. Investing in cash reduces the risk of loss all together and aims to maintain capital.
Choosing the investment that works for you can be a daunting experience. It’s not a one size fits all approach and you should feel comfortable with the level of risk you take. A qualified financial adviser can assist with identifying your risk profile and discuss the available investment options within your superannuation or investment account.