3 things to consider if your Super balance falls
From time to time, market movements may cause your super balance to fall. While this can be alarming, you'll find that it usually recovers in due course. However, if you feel like you need to make some adjustments to your super, here are three things to think about first.
1. Consider how comfortable you are with risk
Almost every type of investment carries some level of risk. Generally speaking, the greater the risk, the higher the potential returns.
Your super is usually made up of different kinds of investments (called asset classes) and they all have different levels of risk. The most common asset classes are:
Shares (also known as equities)
Shares give you part ownership of an Australian or international company and earn dividends through capital growth. Shares are generally considered a higher-risk asset because they’re susceptible to market fluctuations, but they can also provide higher returns over the long term.
Property securities
Property securities are common in super portfolios. Rather than investing in direct property, property securities invest in commercial, retail and industrial property holdings via the share market. They’re considered a higher-risk asset with high potential returns over the long term.
Fixed interest
The most common types of fixed interest investments are bonds. They’re issued by governments and large corporations when they want to raise money – for example, to fund a government or business initiative. They typically pay regular interest over a fixed term – anywhere between one and thirty years. Bonds are considered low risk, low return investments.
Cash
This can include money held in short and medium-term investments that earn interest, such as term deposits, bank bills and treasury notes. Their value is impacted by changes to the interest rate. These types of investments are considered very low risk because their returns are generally low but stable.
The higher your allocation to riskier investments, such as shares and property securities, the more likely it is that you’ll experience market volatility – and this will be reflected in your super balance. You’ll also have the potential to receive higher returns over the long term.
On the other hand, if your super portfolio has a higher allocation to low-risk investments, like cash and fixed interest, you’ll probably experience less market volatility and therefore less fluctuations in your super balance. However, you’ll most likely receive lower returns over the long term.
Everyone is different and you need to decide how much risk you’re willing to accept in your super. This might change through-out your lifetime. For example, you might find that you’re less comfortable with risk as you approach retirement, because you have less time for your super to recover from short-term fluctuations.
2. Diversify your super
One of the ways to lower the overall risk in your super is to invest your super across several asset classes (an investment strategy known as diversification). This is because every market moves in its own cycles, and no matter what type of investments you have in your super it’s likely that they’ll experience a downturn at some point.
Each type of investment can perform differently under the same market conditions – so when the value of one falls, another may go up. While there are no guarantees that diversification will fully protect you against loss, spreading your investments across a range of asset classes can help balance out the overall levels of risk and return in your portfolio.
3. Check that your investment strategy is appropriate
Your investment strategy and risk profile (how comfortable you are with risk) go hand in hand. Your financial goals and investing timeframe should also be considered as part of your strategy.
Here are some different investment strategies that you may come across in super:
Growth
Around 80% allocation to growth assets like shares and property securities, with an investment timeframe of 5 years or more.
Balanced
Around 70% allocation to growth assets like shares and property securities, with an investment timeframe of 5 years or more.
Moderate
Around 60% allocation to growth assets like shares and property securities, with an investment timeframe of 5 years or more.
Diversified
Around 50% allocation to growth assets like shares and property securities, and 50% allocation to defensive assets like fixed interest and cash, with an investment timeframe of 5 years or more.
Conservative
Around 70% allocation to defensive assets like fixed interest and cash, with an investment timeframe of 3 years or more.
Another common investment strategy is ethical or responsible investing. This involves choosing investments that align with your personal moral or ethical views relating to factors such as people, society and the environment.
Whatever type of investment strategy you chose, it shouldn’t be something you set and forget. It’s worth revisiting your investment strategy from time to time – and not just when markets move significantly – to make sure it’s appropriate for where you are right now. That way, you’ll be better prepared if markets do become volatile.