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How is superannuation invested?
Your superannuation is invested in a range of growth assets and defensive assets. Growth assets are considered to be higher risk, but also potentially higher return. Defensive assets on the other hand carry much less risk, but also don't offer very high returns.
Growth assets include
- Australian shares
- International shares
- Private capital including investments in private companies that aren't publicly listed
- Property including commercial, industrial or real estate trusts
Defensive assets include
- Cash products like savings accounts and term deposits
- Fixed interest including corporate and government bonds
- Hedge funds
Types of superannuation investment options
Most super funds will offer a choice between a number of pre-mixed, diversified investment portfolios or a build-your-own option for those who want to be more hands-on with their super. The pre-mixed investment portfolios will invest in a range of growth and defensive assets. Let's take a look at these options in a bit more detail.
With this option your super is invested in line with your age. As you get older the assets your super is invested in begin to change, as does the level of risk you're taking on. It's typically understood that when you're young a lot more of your super balance can be invested in riskier, high-growth asset classes like international shares.
If you're in your 20s or 30s you have a lot more time to ride the ups and downs of the stock market compared to someone in their 50s. As you get closer to retirement, a larger percentage of your super will be invested in safer assets like term deposits.
This pre-mixed investment option is a balance between growth and defensive assets, usually classed as medium to high risk. The balanced investment options will vary between different super funds, but they generally allocate around 65–70% of your super balance to growth assets and 30–35% to defensive assets. The balanced option is usually the default option offered by super funds.
Growth or high growth
The growth and high-growth investment options are high risk or very high risk, for potentially high returns. The growth investment option will allocate about 80–90% of your super balance to growth assets like shares and property. If your fund offers a high-growth investment option, this will likely allocate 100% (or close to it) of your balance to high-risk assets. These investment options are recommended for longer time periods of at least 7 to 10 years, or more.
The conservative investment option is low to medium risk and suited for people closer to retirement who want to protect their retirement savings. The conservative investment option will allocate around 20% to 30% of your super balance to growth assets like shares and property, while the remainder will be in lower-risk options like savings accounts and bonds.
Some super funds offer a socially responsible or ethical investment option which aims to invest in socially responsible assets. For example, it might not invest in companies associated with tobacco production, gambling or ammunition manufacturing. The risk level and asset allocation will vary between different super funds, though this option is usually a similar level of risk as the balanced investment option (medium to high risk).
It's a common misconception that ethical investments don't perform as well as other investments, but this is not the case. In fact, socially responsible investment portfolios often deliver similar or better returns than other investment options.
Single asset classes
This option is for those who want a bit more say over how their super is invested. Rather than a pre-mixed investment option, some super funds offer this build-your-own option allowing you to select from a range of individual asset classes to design your own portfolio.
For example, you might decide to allocate 70% of your balance to international shares, 20% to Australian shares and the remaining 10% to property, creating your own high-risk investment option. Note that you can select the asset classes, eg, shares and property, but not the individual investments. That is, you can't select which shares or which property.
How to choose a super investment option
Here are the key things to consider when choosing your super investment option.
- Your age. If you're young it's a good idea to invest in growth or high-growth options, which you can switch back into balanced and then conservative as you get closer to retirement.
- Your risk tolerance. Regardless of your age, if the thought of your super being invested in high-risk assets will keep you awake at night, you might want to stick to a balanced option instead.
- Your personal values. If you're passionate about particular industries and want to avoid others, take a look at where exactly your super will be invested with each available option. This detail should be available on the super fund's website.
- The fees. Different investment options will charge different fees, so make sure to check how much you'll be paying for each investment option when making your decision.
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