Almost every Australian of working age has some kind of superannuation fund. Whether you run a self-managed super fund (SMSF), or use the services of a retail or industry fund provider, superannuation is one of the primary investment portfolios that the average Australian has to their name.
As most of us would know, superannuation funds come with caveats. We forfeit the ability to access the capital that accumulates in them until retirement. But in exchange, we are entitled to lucrative tax breaks that help us build wealth faster than investing outside of super.
We all know who our individual super funds are managed by (or at least should). However, exactly how the money that each of us contributes every paycheque is invested is a little more opaque.
So today, let's discuss the kinds of investments and asset classes your super fund's capital is probably going towards and which we should aim to invest in.
If you have a self-managed super fund, then the money is obviously controlled and directed by whoever is managing that fund.
But for those who don't have an SMSF, your fund manager will likely assign you a 'balanced' portfolio.
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How is the money in a superannuation fund invested?
A balanced portfolio typically describes the default asset allocation that fund providers offer. They are called balanced funds due to the mix of defensive and growth-oriented assets that will make up the investment portfolio. Under conventional financial theory, all assets sit somewhere along a risk-reward spectrum.
The 'safest', or most defensive, assets on this spectrum are cash-based. For example, a term deposit. This money is guaranteed by the government (to a limit), with the risk of permanent capital loss essentially at zero.
Government bonds issued by advanced economies are also regarded as about as risk-free as one can get. US Treasuries, for example, are traditionally regarded as the gold standard of 'safe investments'.
However, cash investments and government bonds don't offer the same kind of potential wealth-building returns that assets up the risk-reward spectrum do. That's why a balanced fund will also invest members' money in riskier assets. These usually include infrastructure assets and property, but also shares.
As we all know, shares, whether listed on the ASX or internationally, are inherently volatile and risky. They offer no guarantees of capital protection. But in exchange for this risk, they do tend to offer the highest returns of any asset class.
A balanced superannuation fund will typically offer a 60/40 split between growth assets and defensive assets. But this can vary quite dramatically between superannuation funds.
As we touched on above, most investors are placed in a balanced fund by default. However, it's my view that most Australians with a balanced fund would probably be better off switching to a higher-growth option.
We should all be aiming to have as much capital in our super funds at the age we wish to retire as possible.
Too much balance can be a bad thing
If that's the case, it makes sense to invest in the assets that offer the highest potential returns for as long as possible.
By this logic, there is little use for defensive assets in a super fund if its beneficiary is more than a few years from retirement.
Yes, shares are volatile and are subject to the odd market correction or crash every few years. So if you are someone who plans on retiring within the next ten years, then it might be prudent to move to a balanced portfolio or a more conservative option. However, suppose any Australian has more than ten years left before their desired retirement age. In that case, it makes little sense to have capital in assets that might not deliver the best returns available.
Market crashes do happen. But stock markets tend to bounce back from them after a few years at most. So if you are aiming to retire at 67, it arguably makes sense to be fully, or at least mostly, invested in growth assets like shares until you're at least 57. Over your last ten years in the workforce, you can always transition your portfolio to more defensive, conservative assets. But if you're more than ten years away from retirement, there is a strong case that the growth assets should dominate your super fund.
Making this simple change could make a substantial difference to how much wealth you have to fund a happy retirement.
Of course, this is all very generalised. You should speak to a financial adviser who takes your individual circumstances into account before you make any changes to your super fund or retirement plans. But 'balanced' is not always the best path to take when it comes to superannuation.
