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Shares versus superannuation: Where should you invest?
Unsure whether to use your extra income to contribute to your super or buy shares? Here are some benefits of each.
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Employees
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If you have some spare cash lying around, you might be wondering whether to invest in shares or to top up your super fund. Both are a form of investing, and each option comes with its own advantages and disadvantages. Investing through superannuation comes with lower taxes, while investing through your own share trading account will allow you to access the funds whenever you like. Read on to learn more about the differences between these investment options in this guide.
What are shares?
When you purchase shares, you get part ownership (or a share) of a particular company. You can't buy shares in any company, only those which are publicly listed on the Australian Stock Exchange (ASX).
As with any company, it can perform well or poorly. When a company performs strongly, the price of its shares rise. This is good news for investors as the value of their shares has increased. This is referred to as capital growth, and means that you can sell the shares for more than what you initially paid for them. However, if the company performs poorly, the value of the shares decreases.
What are dividends?
In addition to the value of the shares increasing, many companies will also pay shareholders a dividend, which is basically a share of the company's profits. The amount you receive as a dividend payment will be directly related to how many shares in the company you hold. If you invest in enough shares, you could create a second income stream out of the dividend payments alone.
Keep in mind that a company isn't required to pay shareholders a dividend when it's doing well. A company may decide to re-invest that money back into the company to help it grow and thrive. This is also good for shareholders since it means the value of the company will increase over the long term as will its shares.
What is superannuation?
Superannuation is a way to save for your retirement and is basically one big investment portfolio. Your employer is required by law to pay a portion of your earnings into your designated super fund, which is managed on your behalf. The money in your superannuation is invested into various assets, including shares, with the main aim of growing your balance over time.
As the main purpose of superannuation is to fund your retirement and to be a substitute for the Age Pension, you typically cannot access it until you're retired. There are some rare situations where you're able to access your super early, which you can read more about here.
What to consider when choosing between shares and superannuation
There are a few factors to consider when deciding to invest in shares or contribute to your super.
Economic conditions
Shares and super are both dependent on wider economic conditions. Both are investments so the performance returns can change depending on the economy. That's why when you have shares and/or super, it's best to regularly check the performance of the company and the super fund so you know your money isn't losing value.
Super is a long-term investment, so short-term declines and dips in the economy won't affect it too much unless the economy continues to decline. The long-term nature of super means it is well placed to ride out any waves and dips in the market.
However for some shares, if it's a short- to medium-term investment, the direct impact of market conditions can seriously affect the value of your shares. This is especially true in a volatile market or during times of economic or political uncertainty. However, if you plan to hold your shares for the long term (for example 7-10 years or more), your investment will be better placed to overcome small dips in the market.
Diversification
Diversification is an important strategy for an investor to minimise risk. Superannuation is typically more diversified since it invests in a whole range of assets from cash and shares to property and government bonds.
However, you can still achieve a relatively diversified portfolio when investing in shares by making sure your investments are in different industries. For example, having a mix of Australian shares, international shares, shares in technology companies, shares in blue chip companies and even shares in companies that invest in shares (these are called Listed Investment Companies) and so on. That way, if the entire technology industry suffers, you don't have all your shares in that sector alone.
Your risk tolerance
Typically, the more risk you're willing to take, the greater reward you get if all goes well. If you invest in shares, there is quite a lot of risk involved, especially if you are new to the stock exchange. Unless you have a financial adviser helping you through the process, you'll have to manage most of your shares yourself, which can be tricky when you're first starting out.
With super, your money is managed by the fund and it decides how to invest your money. There can be less risk involved with super since it's managed by a fund, but you still have the option of choosing a more risky option if you want it.
However, while shares may be more risky, there's also the potential to earn more money in the form of dividends or capital growth in the short term, which could be appealing. It depends what your strategy is, and what you want to achieve from your investment.
Your investing expertise
Your level of investment expertise may affect your decision as to where to invest your extra money. Superannuation is managed for you on your behalf, so if you have no investment experience and aren't interested in learning, it could be best to contribute to your super instead of buying shares.
However, if you do have some investment experience or have done some research, shares could be a great option. Just be prepared to stay engaged. This means monitoring the share price, keeping up-to-date with the company and staying on top of broader market and economic conditions.
Your age matters
Age is a big factor when determining if you should go for shares or put your money into your super. Anyone who owns shares will receive their returns without restriction. You may receive dividends or sell your shares for a higher price whenever you choose. Theoretically, shares are a long-term investment if you want to make a decent return, so investing in shares when you're about to retire may not be a good idea.
On the super side of things, you have to wait until you retire before you start accessing your benefits. So if you're young and want to access your returns immediately or sooner rather than later, investing in shares may be a better idea. However, if you prefer to save for a more comfortable retirement, putting your money into super will be a better way to guarantee safer returns.
Investing in shares over your super: pros and cons
Pros
- Individual ownership of the shares.
- You get dividend payments.
- You get capital growth.
- You have complete control over your investment decisions.
- You can sell at any time.
Cons
- Shares are less diversified than superannuation.
- They are generally a higher risk.
- They require a greater level of engagement and more expertise.
Compare Share Trading Accounts
Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Investing in your super over shares: pros and cons
Pros
- Your super is managed for you.
- It's a more diversified portfolio than shares alone.
- There is less risk involved.
- You benefit from long-term growth.
- Tax concessions are available.
Cons
- You cannot access the funds until you're retired.
- You have little to no control over where your money is invested.
- There are limits as to how much you can contribute to your super.
Compare Super Funds
*Past performance data is for the period ending June 2019.
Self-managed super funds
An option for people with an interest in and time to dedicate to managing their finances is a self-managed super fund.
Self-managed super funds, or SMSFs, are effectively smaller super funds set up by individuals or groups, to manage their own super contributions and investments. All the decisions around how the money is invested are made by the individuals who set the fund up, who operate as both members and trustees of the fund.
There are several steps to setting up your own SMSF, as well as ongoing requirements around administration, compliance and reporting. You can read more about what's involved in setting up and managing an SMSF in our definitive guide on SMSFs. Once it's established, you can arrange to have your employer contributions paid directly into your SMSF. You can then decide how to invest the funds - whether that means buying shares, investing in a managed fund, or depositing funds into a high-interest savings account.
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Ask an Expert
I have only 25,000 in my super. I need to try and grow my super. It’s with ANZ Bank and it’s not making anything. Do you think putting some money in shares make my money grow? I’m 59 years old and need to make this money grow can you help me?
Hi Edward,
Thanks for getting in touch with Finder. I hope all is well with you. :)
Whether to transfer your money from your bank account to shares or not would depend on your needs, preference, and budget. However, at this point in time, it would be a good idea to consider the pros and cons of each of your options.
For example, when you invest in shares, bear in mind that it takes years for your money to grow. Not only that, but you also need to remember that like any investment, your money in shares can increase but it can also decrease.
Please make sure that you consider the risk of buying shares. If it is a risk that you can afford to take, then, by all means, you might want to get into share trading.
If you want, you can also speak to share trading experts. They should be able to give you more pieces of advice to help you make a better decision.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua
Dear Sir/Madam,my wife and l a.own our own home b.my wife has an investment property(positively geared..value $400k..mortgage $220k.) c.we are selling a property and should have circa $150,000 net d.our combined super is circa $1 mill. My wife(58) is undertaking transition to retirement(a teacher with defined benefit super)I,m 59 self employed…and love my work!…..q. a.should we invest the $150k into our separate super fund($75k each) or purchase a house(we live close in Toowoomba and could purchase a rental property for under $400k..q.b.with all the doom and gloom scenarios re. world economy do you believe we shall be able to have a good quality of life in retirement..? We are conservative folk from humble origins with simple tastes but do like to travel os….your counsel is valued, cheers
Hi Kev,
Thanks for your inquiry and sorry for the delay. Just to confirm that you’ve reached finder, a leading comparison website, and general information service. We’d be glad to offer you general advice to answer your questions.
As we are not financial experts, we may not be able to advice as to how and when is the best time you can invest your super. It would be best that you speak to a financial planner who can help you achieve your financial goals and understand your needs. We have a guide about seeking financial advice which you may find useful.
Cheers,
May
i am 62 thinking to retire .my husband 8=69. have b2 investment properties worth $1700.000 with a loan of $1000.000.want to sell one property ,but scare about c g t.How can avoid that capital gains tax
Hi there,
Thanks for your comment. We are a comparison website and as such, can provide general advice only. If you have any concerns or would like to discuss your personal situation in more detail, we recommend speaking to a financial planner.
Regards,
Clarizza