Making smart super investment choices

Choosing the right investment option for your superannuation is important for your retirement savings. It’s essential to understand the different types of investment options and their associated risks to ensure you choose the one that’s right for you.

Premixed, choice and lifecycle options

Super funds typically offer a range of premixed investment options that usually have different asset allocations:

• Growth: These options primarily invest in shares or property and aim for high returns over the long term. They come with higher probability of short-term losses, so they’re generally suited to people with a longer investment horizon.
• Balanced: With about 70% in shares and property, balanced options strive for moderate returns with less risk than growth options. They offer a middle ground for investors who seek growth but prefer less volatility.
• Conservative: Investing primarily in fixed interest and cash, these options focus on preserving capital with lower returns. 
• Cash: With 100% investment in cash or equivalent, these options offer stability and capital preservation, suitable for very risk-averse individuals or those close to accessing their funds.
• Ethical: These investments exclude companies that don’t meet certain ethical standards and vary in market risk, allowing you to align your investments with your personal values.

In addition to premixed options, some super funds offer single asset class investments (eg Australian shares fund or international shares fund) and you can choose what percentage you invest in each asset class yourself. Some “platform” style funds also let you pick direct investments. This can include investing in individual shares, exchange-traded funds (ETFs) or term deposits. Direct investing such as this is not restricted to just self-managed superannuation funds. 

Many super funds also offer lifecycle investment options, which automatically reduce your exposure to higher-risk growth assets as you age. These can be a good choice if you want to take a hands-off approach to your investments.

Your risk profile

When selecting your super investments, it’s important to consider your risk profile. Your risk profile is essentially your comfort level with potential investment losses in pursuit of returns. Here are some considerations:

• Risk tolerance: Determine how much market risk you’re willing to take. Are you comfortable with the possibility of short-term losses for higher long-term gains, or do you prefer stability?
• Investment horizon: The amount of time before you access your super can influence your risk tolerance. Longer horizons may allow for more aggressive investments, while shorter ones might necessitate a conservative approach.
• Standard market risk measure: Super funds provide a standardised risk rating that predicts how often an investment might deliver a negative return over 20 years. This measure helps compare the risk levels of different investment options.

For example, if you’re 30 years old and have a long-term investment horizon, you may have the time horizon to ride out the ups and downs of a growth investment option. However, if you’re 55 and nearing retirement, you may want to switch to a more conservative option that will have smaller fluctuations in value. However, inflation risk means that the return on overly conservative investments may fall short of the rate of inflation – reducing the purchasing power of your investment over time. So there are several types of risk to consider other than just market risk.

Overall, choosing the right investment option for your super requires careful consideration of your individual circumstances and goals. Online resources such as ASIC’s Moneysmart website can help you make an informed decision, and many super funds offer free guidance. It’s also a good idea to consider getting professional advice, for example by consulting a financial adviser.

Source: https://moneysmart.gov.au/grow-your-super/super-investment-options