Topic One: Superannuation - Investment options

Choosing an investment option for your super can have a significant impact on your retirement savings over time. In this topic we explore how you work out what investment option might be suitable for you and how to determine if that needs to change at retirement. We also discuss key investment themes like asset allocation, diversification, performance, active and passive investment choices, the "bucket" approach, and switching investments.

Notes for this topic which includes tables, charts and graphs referred to in the episode can be found by following this link:

Topic One Investments - NOTES.docx

Action plan:

1) Identify what investment option you are currently in and understand the returns (performance) and compare it to others – make sure you look into how they are invested. You could also refer to www.superratings.com.au

2) Understand the risk involved with the investment option you are currently in and look for the likelihood of a negative year and what type of falls might be experienced and think about how comfortable you are with that by understanding your investment timeframe and understanding how long you have to be able to absorb a negative year.

3) Make an appointment with a financial adviser to identify your investor profile and get investment option advice. Or you could start by contacting your super fund to see if they offer this service or have an investor quiz you can take online.

Transcript

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Hello and welcome everyone to the very first topic in the retirement school, and that is about your super fund and how your money is invested. But before we get started on that topic, I wanted to take a moment to talk about Super and why I'm going to spend so much time on Super accounts and how super can impact on your retirement. There are about four episodes talking about Super, and the reason why I think it's so important is the federal government for quite a number of decades now has been pushing through reforms and incentives to increase the self-funding of retirement by Australians. And Super, as a result, has become one of the most tax-efficient vehicles to use in retirement. And even as recently as the federal budget of May 2026, we saw that when Super gets more favorable treatment than other investment structures. I believe it's a cornerstone of your retirement strategy. And so whether or not you have a small or a large super balance, focusing on it and maximizing it will be in your best interest when it comes to retirement. And most of us will have at least one superannuation account if we've been working for an employer at any stage, as employers have to make mandated contributions to super. Now there are two phases to super. The first is the accumulation phase, or what we could call the growth phase, or the savings phase, where we were we are building up our money in preparation for retirement. And obviously, the second phase is that retirement phase where we start to draw down on those savings to fund our retirement. Now most people will stay in the accumulation phase until at least age 60, which is generally the age you could start to access super, and we're going to talk more about that in a future topic. You can keep your money in accumulation, that growth phase at any age, but whether to move from an accumulation account to a retirement account is what we will talk about in topic four. During the accumulation or the growth phase, there's two ways to grow your super savings. The first one, the one that will have the greatest impact, is through contributing money, and that's what our next topic is going to be about. The second way, though, is investing those savings in an option that grows over time. And making the right investment choice can make a big difference because generally your funds can't be accessed, so any earnings you accumulate along the way will have the benefit of compound growth, which means that every time you earn money in one year, it adds to the balance, which earns more money subsequently in the next year by having a larger balance. But even after you switch from that growth phase to the retirement phase, making the right investment choice can really help you preserve your capital in an appropriate way, depending on what your retirement goals are. So investing is important, and one thing that research has shown us is that many people don't actually know how they are invested in their super, and about one in four choose the default option, and that is the option that is nominated by their employer or the super fund when you don't tick a box saying which option you want to be invested in. And being in the default option might be okay, it's actually can be a low-cost way to grow your super, and when you're younger, so when you start working in your 20s, that default option will generally be focused on growth, even high growth, for 20, 30, 40 years before you can access your super because you've got the time to write out the bumps. But as you get close to retirement, people start to find they're a little bit more interested in how their funds are invested. Maybe because their attitude is changing, they want to make sure their retirement funds are as secure as possible, or they want to grow their retirement savings as much as possible in the lead up. So, how do you approach reviewing what investment option you're in and what might be a suitable choice for you? Well, the first thing a financial advisor will do is try to determine what type of investor you are, and they'll often use some type of risk profile questionnaire to determine this. And in fact, some of the super funds have a version of this, something like an investor quiz on their website as well. And the questionnaires are likely to consider a number of factors, four of these being the most common. The first is your time frame to retirement, how long before you want to access your money. The second is your super balance and perhaps the value of any other assets you have outside of your own home, which if you plan to keep living in it, to understand your knowledge, experience, and the availability of money for your retirement. Now the third one is more about attitude, it's about expectation of investment returns. And the fourth one, similarly, rather than returns, it's a tolerance of risk because that helps the advisor to understand what you're going to be comfortable with or what your expectations are. So let's start with drilling down into all four of those, and time frame is the one that comes up first. So you'll often get a question something like, how long until you plan to retire? Now this is important, I guess, when we talk about those default investment options. What will happen is they're often age-based. So under age 45, maybe ABA, under age 50, like I said, they're going to be growth because you've got a long time frame before you can generally access your super. But what will happen, what the super fund managers often do, is they start scaling down the growth component in your investment option and making it more conservative, so that by the time you reach, say, 60 to 65, it can often be very little growth, and now it's much more conservative. And this might be appropriate, but it doesn't tell the whole story. So one of the things that I want you to think about is that something simplistic, like how long until you've got to retire, is not really going to help you find a tailored option to your circumstances. And to illustrate this, let's look at a few people. But he won't be touching his super at retirement. He's got a pretty healthy super balance, a million dollars. He's got a work, he's got a wife that wants to continue working for at least another three to five years, and he owns his own home outright. So John's set up pretty well, even though on the face value he's got a short time frame. Peter is a little bit older than John, 60. He wants to retire in five years. So once again, on the face of it, it looks like he's got a longer time frame than John, somewhere approaching more like a medium time frame. He also owns his own home, but the difference here is that he's got a mortgage of 300,000 and a super balance of only 500,000. I say only because the most important thing Peter wants to do in five years' time is pay that mortgage off. Now he's estimating that his mortgage might be 200,000 to 250,000 in five years. So when you look at it that way, he wants to use half his super within five years before he starts his retirement or at the commencement of retirement. And lastly, we've got Michelle. Now she's 59. She has a really low super balance compared to the other two fellows. She only has 150,000. This is not unusual for females in her age bracket who might have had career break uh career breaks to raise family, they might have worked part-time or casually where they didn't get employer contributions. We'll talk about this in the next topic. Um, so as a result, she thinks she needs to work until age 67, which is the age pension age. So that's eight years away. So of the three here, she's got the longest time frame. If we just looked at time frame, problem is Michelle's had some health issues, and she's actually worried that she might need to stop work at any time. And even tougher for her, she doesn't own her own home. She's renting. So if Michelle needed to retire next year, she would have seven years where she would need to fund herself until that age pension eligibility with a pretty small super balance. Even though she's got the longest time frame, I'd argue that she might have the shortest one in terms of need for super potentially. So time frame can't just be looked at in terms of number of years. I really think you need to look at it in terms of you know how much balance you've got, the likelihood of drawing down on large parts of that balance, and when that might happen rather than simply when you might retire. Now the reason I raise this as well is that the shorter the time frame that's nominated, the more conservative the outcome will be. So in John's case, two years would almost guarantee that he would be looking at a fairly conservative, if not sort of a cash outcome, because it's a pretty short time frame and if he wanted certainty. So why is superbalance and the value of other assets important? Why will you get asked that? Um, simply because people like John with larger superbalances or other sources of income, in his case, a wife that wants to keep working, may have less risks, they can afford to sit out poorer performing periods in investment markets. Whereas people like Michelle with lower superbalances and no other assets or income to rely on, can't take such a risk. So superbalance is important. The other reason an advisor might ask you about your superbalance and other assets is to know if there is access to other sources of funding so that you aren't so reliant on your super. So, for example, if someone has a lot of cash and term deposits, if there was a downmarketed super, they can afford to sit it out by using the cash. Conversely, somebody who's got quite high risk assets or relying on a single asset elsewhere might need to ensure a bit more capital security with their super because it's the only thing they can draw on come retirement. Okay, so let's go on to investment returns. It's not uncommon for people to focus solely on this, particularly if they're worried about money and affording to retire. And I think the media, including social media, puts a lot of emphasis on the sort of returns your super fund can get. And some of those returns are fairly unrealistic, and you have to read through the fine print to understand what they're based on. So it's pretty natural to look at returns, but you need to do some homework before you set in your mind what kind of return you're expecting. So the federal government does a performance test for Super, but they're also independent comparison sites where you can look at returns. Net of fees, very important. Low fees and lower returns may not be better than higher fees but higher returns because relatively the returns could make more of a difference than the higher fees. So you need to use an independent measure that's net of return. Have a look at what your super fund is earning and what other super funds in a similar type of investment to you are earning to know what's realistic and not just on a one-year basis. A lot of that media advertising will be the best return that they've got in the in the most recent period, say in the last year, and finding out from a friend that their super fund got 10 or 11% without understanding what they were invested in, or on what basis that 10 or 11% has been quoted isn't very helpful. You really need to look at a longer time frame. I have put a chart in that shows how different assets perform over time, and one of the things that becomes really obvious is that each of the assets will have their time in the sun. So this is pretty basic investment knowledge. Um, cash will uh perform better sometimes in down markets than shares will if they're under pressure, where there's an external event like COVID or war in Iran. Um, but then when things are good, then shares generally will outperform cash. So it is swings and roundabouts, and um understanding that it takes a full cycle to really know what kind of average return every year you can get from any one type of asset classes, what's important, or a mix of asset classes what's important. So generally the industry will use 10 years as a benchmark, and that's what you should be looking at. What's reasonable to expect as a 10-year return? And of course, we might have just had a good 10 years, so the next 10 years might not be as good. So it doesn't have to be a number. So when you get asked about returns, you don't have to have a magic number like I want 6%, you know, every year as a minimum. It could be that what you want to do is for your money to keep ahead of inflation, to know that it's not going backwards just purely because of inflation, and that is sometimes one of the issues with cash, that cash doesn't adjust for inflation. So a dollar, what's a dollar today isn't going to buy you the same amount of things next year that dollar if there's been high inflation in the meantime. So um understanding is it something like keeping ahead of inflation, or when you get to retirement and you have a drawdown amount every year, do you want to keep pace with that, or do you want to keep pace with that plus inflation, or are you really trying to go for the ultimate of growing your super through retirement? And that's a really tough one to do. That's a high expectation of returns. So the important thing is that returns are directly correlated to risk. So the last factor that you're going to be tested on. And the COVID dip in 2020 in investment markets gave us a perfect opportunity to explore this concept more. So I'm going to suggest that all of us listening to this course today went through COVID and understand the impact there. Some super fund investment options dropped as much as 40% in a very short period of time. And I'm sure that it made you and myself pretty uncomfortable when we saw it and we didn't know how long it was going to last. So it wasn't just how you felt about it, but what did you do about it? It's a really important question. So just because you were nervous, did you act on it? Did you change your investments into something in your mind that was less risky, like cash? And if you did do that, did you regret it when markets recovered in that really short time frame, which is unusual, but nevertheless, did you get caught out? Or did you decide to wait it out? Did you get some advice? Leave things as they are. That'll give you a bit of an understanding of how risk averse you are in terms of the actions that you took. So when you are doing one of these investor quizzes, that return risk, you can't decouple it, you can't have high return expectations, but not want to take any risk. And you'll probably understand that if you've done some homework on returns already, that the sort of risks that you might have to take, because a lot of when you look at investment options, they'll talk about the risk of a negative year. So you'll understand: is it one in four, is it one in ten, is it one in twenty years that I might have a really bad negative year? And what would I be comfortable with? I think risk is the most important factor here when you're doing one of these investor quizzes. And you need to understand how they all correlate because time frame is very, very important to risk. A market cycle is generally seven to ten years in duration, and what that means is from the peak of the cycle, you know, falling, uh, markets falling in the middle and then climbing back up to a peak generally takes seven to ten years. So if you have a short time frame, you don't want to be caught on the wrong side of that market cycle, and that's where risk is going to come into it. And of course, your accessibility to funds to sit through it. So this is where you need to do some homework before you go in and do one of these quizzes so that you don't get put on the spot and you just answer the first thing that comes to your mind, but then you go back and regret it later and think, oh no, I should have answered it this way. You need to be as well informed as you can be before you do a quiz to make sure that the outcome really matches what's going to be right for you when it comes to choosing an investment option. So you've done the quiz, you've done your homework, you're given an outcome by the advisor or a website if you're using a quiz there that will suggest likely options that could match could match your profile. You then need to go and have a look at those profiles and understand things like the expected return or the historical return, the risk, you know, those negative years, and what's involved in each of the investment options and some of the things that I think you need to think about when you're looking at them. One of the most important investment principles is diversification, and I'm sure you will have heard this before. Don't put all your eggs in one basket. With investment markets, that simply means having a mix of different asset types, markets, and time frames. So if you're investing in one of the big retail super funds, they're likely to have a menu of diversified options. They might have labels such as the conservative option, the balanced option, the growth option, and that will match the investor profile that you came out with after the quiz. And for many, this could just be a really simple solution to use the diversified option, match with it, and almost set and forget. And I'll talk about this, you can't always set and forget, but to make it as easy as possible. That is going to be the approach. But what some investors like to do, particularly if you're retiring, they want to take a more active interest in financial affairs, they want to take their own approach to mixing and matching between options. And sometimes an advisor will help them do this. So, you know, I want to put 10% of my money in cash, 30% in Australian shares, etc. And this approach can present challenges. So I just want to get you to think about you can't sit and forget with this type of approach. Market conditions are going to change, the assets themselves are going to change, and your balance will change, particularly as you start to draw down on it. And you really need to have the time, the interest, or the knowledge to keep adjusting your allocations because they will change over time, and not from you changing them, but from market conditions and drawdowns and things like that changing them. In a diversified option, such as the ones that you might get in a retail super fund, there's a manager who will do that reallocation of assets for you, and they may be better placed to react to changes and conditions than you are. So really challenge yourself, you know, if you're going to take long trips overseas or caravanning around Australia, do you really want to be having to watch all those changes and be rebalancing? I would suggest at least once a year, but perhaps more regularly, or are you happy to let a manager do it for you by using one of those diversified options? Now I think almost worse than trying to do it yourself is not having diversification. And I think the ATO came up with a statistic that said something like one in three self-managed super funds only have a single asset or a single asset with a little bit of cash. This is a problem when you start to approach retirement because there is no sheltering from risk if you have only one asset or one asset type. If that asset goes down or underperforms, or you lose income, like say from a property where you lose your tenants, you have nothing else to support that single asset, maybe a little bit of cash. And what you don't want to do is be forced into a position where you have to sell the whole asset in a down market at a lower value, just to make sure you have enough money to cover your income for drawdowns. So the approach of having just a single asset gets A lot riskier as you get closer to retirement and drawing down funds, and I think it's a really important reason to seek advice. Okay, another important aspect of investing is whether to go with an active or a passive investment approach. Now there's been a lot in social media and guidance on you know retirement books about using these passive low-cost investment options called ETFs or exchange traded funds. Now they're often passive investment funds, investment options, not always, but often passive investment options. What this really means is that you are placing funds in a kind of a bucket type of investment products where nobody's making an active investment decision. There's no investment manager overseeing what changes are made to that bucket of funds. They will simply replicate an index or a benchmark or a set of rules that have been established with very specific criteria. So to give you an example of that, in Australia the most common index, we hear it on the news at night, is the ASX 200. And what it really represents is the 200 largest companies by size that are listed on the Australian Stock Exchange. And what happens is the size of the companies in this index is determined by the number of shares they have issued by their share price. Keep it really simple, when the share price moves, and if it moves in a sustained way, there will be changes to that index. Companies that are losing ground may go out, and companies whose share prices are rising may come in. So what happens with the ETF? Administration manager, they're going to change the holdings they have in accordance to the changes that have been made by the index managers. Now it is a great structure in terms of keeping administration costs really low and therefore low fees to you. And the result is that you'll get a very similar performance to the index that's trying to replicate, so you'll hear people talking about an average, and they can be really suitable for a lot of people. But coming back to that, not focusing too much on fees or returns, but returns net of fees, sorry, then there is a difference higher fees for an active investment manager who's actively out there seeking opportunities to add value and attempt to beat the average. Now I'm not saying that means they always do, but it can be hard sometimes if you're just in the average to get the same result as somebody who's going out looking for the next Google or Microsoft or BHP or whatever it may be. The other thing that the retail super funds can do with these actively managed, which is often just those diversified options, is that they can buy into assets that aren't readily available, values aren't as transparent in the short term, so they therefore there can't be an index or a benchmark put around them, so there can't be an ETF replicating them. And what happens is we've got so much money in investment markets in Australia that the super funds are out there looking how else can I find value? And you only get to participate that within those assets if you're in an actively managed option. So just be careful to understand your active or passive and what type of returns might result from that. Now the last strategy that I want you to think about, because once again it's a really popular one, is being recommended taking a bucket approach. And what the bucket approach really is doing is that once you reach retirement phase, you should hold two or three years of income in a stable investment option like cash. So, say in John's case, if he needed his super in two years' time, an advisor might say, let's put aside that portion of super that you want to withdraw at retirement and make sure that it's going to stay stable until retirement. Now, this could make sense for you, it's a pretty logical approach, but the one thing I want you to be careful of, if you're putting the rest of your money in a diversified option run by the manager of a super fund, just be careful that they also are going to have an allocation to cash. And this could range from 10 to 30 percent, depending on what that manager's view on investment markets are, and how much of the people in their bucket are actually intending to make drawdowns in that time frame. So, what you could have is you could be doubling up on your allocation to cash, so you're keeping money outside of that in diversified investment investment option in cash, plus there's a big allocation to cash within it. So the reason why I say to look at that and understand it, because the manager is effectively taking a bucket approach internally for you. Um the reason I say to look at that is that you don't want to have cash underperforming in a growth phase of the market. So at the very least, you should be looking at reviewing that at least yearly as your cash starts to disappear, or something like an auto rebalance to adjust that. Now, the last thing I want to talk about before we close on this topic is switching investments because a lot of people ask how often should I be doing this? So, another really well-known principle when it comes to investing is to take a long-term approach, and you might think, well, but hang on, going into retirement, I don't have a long time, and you may not. I go back to that question on time frame, but just because you're retiring in two years like John might not mean that you have a really short term time frame, particularly if you have a large balance and you're expecting it to last for 20-30 years in retirement. Um, so you may have a longer term approach than what you realize, in which case chopping and changing can be a bit self-defeating when you've got the time, the luxury of money to sit through a market cycle. I spoke earlier about COVID people switching down into cash and then getting caught out and having to buy back in at higher levels. You really don't want to have to be chasing your tail in retirement. So, unless your circumstances change significantly, trying to switch investment options, even trying to get advice constantly on whether you should switch whenever there's a little glitch in investment markets can just spoil some of the enjoyment of retirement and not having to worry about those things. So just keep in mind get the right choice in the first place so that you can sit back and relax and let it do the work for you, and only if something significant changes, like you need a large part of your capital, or you've got changes in family circumstances or ill health or something like that that might be a genuine need to go back and review it. Okay, that's a lot to take in for our first topic. So I'm going to summarise a couple of action items for you to take. The first thing is to look at what you're currently invested in and understand the sort of thing you're invested in and how it compares to other investment options. Make an appointment with the financial advisor or take a quiz online to try and identify the type of investor that you are and whether how you're currently invested is really suited to that. Think about your time frame so when you go in and you talk to that advisor, you've got a really good grip on what your time frame really might look like and understand the risks involved. Like I said, look at the likelihood of a negative year so that when you ask the questions, you can answer them in a really well considered way and make it more relevant for you. That's it for topic one. I look forward to seeing you in topic two, which will be about contributing to your super.