When it comes to super funds, most Australians would agree that there are a million more interesting things to occupy one’s mind and time with.
Nonetheless, our superannuation represents our retirement and can determine how we spend our golden years. Thus, I think it’s something all of us should at least be on top of.
Now, most Aussies without a self-managed super fund (SMSF) have their super in either a retail or industry fund. Typically, these funds will put your hard-earned 9.5% in what’s known as a ‘balanced’ fund. Has a nice ring, doesn’t it?
But a ‘balanced’ fund is not quite as cosy as it sounds. It’s typically the super company’s default choice, and is named for the ‘balanced’ manner it invests your money. This is normally across many different asset classes like private equity, government bonds, cash, property and (of course) shares.
Now, this strategy is okay. Not brilliant, but okay for most people. For investors, particularly ones with long-time horizons, it’s normally not the best choice.
The benefits of indexing through your super fund
Firstly, this is because investors with decades left until retirement will likely benefit from an aggressive portfolio allocation, rather than the plain-Jane, vanilla balanced super fund. Your fund doesn’t really need defensive asset protection through bonds and cash if you’re in your 20s or 30s. Instead, you should be primarily invested in growth assets like ASX shares, international shares or maybe property.
These investments are more volatile, sure – but they’re also more likely to generate the best returns. And getting the best return you can, for as long as you can, translates into more money for your retirement.
Secondly, a balanced fund is normally expensive. Not usurious, but expensive all the same. A far better option (in my view anyway) is to simply invest in index funds.
Not all superannuation funds offer an indexed option, but many do. And you’ll find the ones that do will be up to 10 times cheaper than the fund’s default ‘balanced’ option.
It costs far less to invest your money in a couple of simple exchange-traded funds, such as iShares Core S&P/ASX 200 ETF (ASX: IOZ) and perhaps the Vanguard MSCI Index International Shares ETF (ASX: VGS), than employ a fund-managing team. And that’s all an indexed option would typically do.
Not only do indexed options charge significantly lower fees, but they will also often outperform the balanced or even the ‘aggressive’ managed options, saving you money on two fronts. Remember, the difference between 1% and 0.1% over 45 years can be astronomical to a fund’s final balance.
Now, these aren’t universal truths and you will need to do your own comprehensive research into whether this strategy would work for you. But it’s a strategy I personally use and one I think is worthy of consideration for anyone who wants to maximise their super fund’s potential.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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