super

INVEST IT RIGHT

INVEST RIGHT

The biggest driver of investment returns (before fees) is the type and mix of assets you choose. In other words, how much of your money is invested in shares is more important than the amount allocated to (say) Telstra. This is called asset allocation.

Get your asset allocation right to get the return you need at a risk you are prepared to accept.

Generally, if you target a higher return you need to accept a higher level of risk. If you are not prepared to take an appropriate level of investment risk, you may need to make greater contributions to deliver the same level of retirement income.

Some asset types (like cash and bonds) tend to produce low but steady returns with a low risk of losing money. These are referred to as Defensive Assets. Others like Shares, produce higher returns with more variability and the chance of losing value. These are known as Growth Assets.

For long term investments like Super, mixing Defensive and Growth assets in the right proportion can deliver higher long term returns with less variability and risk. Too little growth and inflation will erode the buying power of your savings while too much in Growth assets can create volatility potentially leading to panic reactions.

The risk in any investment choice is usually described as being in one of 7 categories. Each one has a target return and the expected number of years in which it will lose money (see table below).

Sherpa says: Find out about Risk and what it means for your investments.

Get your Money Personality Profile to understand your risk tolerance.

Understanding RISK

Risk level What it means for you

Very High07

High Growth/Aggressive

0-5% Defensive / 95-100% Growth

Negative return is 6 years in every 40

Target returns should exceed CPI+5% (7.5%+)

For those able to tolerate a lot of short-term ups and downs
High06

Balanced Growth

20% Defensive / 80% Growth

Negative return is 4-6 years in every 40

Target returns CPI+5% (7.5%)

For those able to tolerate more short term ups and downs
Med-High05

Balanced

25% Defensive / 75% Growth

Negative return is 3-4 years in every 40

Target returns should exceed CPI+3% (5.5%)

For those happy to tolerate some short-term fluctuations
Medium04

Diversified

35% Defensive / 65% Growth

Negative return is 2-3 years in every 40

Target returns CPI+2% (4.5%)

For those not able to tolerate short-term fluctuations
Low-Med03

Capital Stable

65% Defensive / 35% Growth

Negative return is 1-2 years in every 20

Returns may keep pace with inflation, little opportunity for growth

For medium term investors
Low02

Cash Plus

80% Defensive / 20% Growth

Negative return is 1 year in every 20

Returns close to bank deposits, may not keep pace with inflation

For investors with a short-term goal
Very Low01

Cash

100% Defensive

Negative return is 1 year in every 40

Target return bank deposits, will not keep pace with inflation

For investors with a short-term goal

These allocations and approaches vary slightly from fund to fund and the descriptions aren’t necessarily consistent. A target return of inflation plus 3-5% (5-7.5% total return at current inflation rates) is a reasonable level to expect from a balanced or balanced growth fund.

At LifeSherpa we use 7.5% annual returns to determine our Super benchmarks.

Over 10 years the top balanced funds (with between 60% and 76% growth assets) have delivered over 8% per year, the average of the top quarter was 7.6%, the median fund delivered 7%, while the worst performing quarter of balanced funds delivered 6.1%.

While past performance may not be a reliable predictor of future performance, picking the right manager can make a big difference.