Understanding how super is invested may help to explain why events like COVID impact account balances, if at all.
There are three main types of investment strategies which can be applied to super. Some of these strategies are focused on growing retirement savings by choosing investments that offer good growth potential over long periods of time. Others aim to generate a stable income by safeguarding investments from market volatility.
In this article we’ll provide more detail about what the three main investment strategies are for super.
Risk tolerance
Before we address the three main investment strategies for super, it’s always important to consider risk and market volatility.
An investor’s risk tolerance depends on how they feel about taking risk and their ability to do so, such as whether an investor is financially able to wear the risk.
By understanding this, it can make decisions about the structure of an investment portfolio much easier.
Asset classes like shares and property, have higher return potential and experience greater fluctuations in value, than cash or fixed income investments. How much exposure an investor chooses to have in each of these asset classes may change depending on their level of comfort, especially during periods of investment market instability.
1. Growth investment strategy
A growth investment strategy is designed for investors with a long investment timeframe who feel comfortable with their investment balance fluctuating over short periods of time, in the pursuit of long-term potential growth.
As such, a growth investment portfolio is generally skewed towards growth investments such as shares and property (70-85%) with the remaining invested in defensive assets such as cash and fixed income.
Over a 20-year period, growth strategies have proven to deliver higher returns than more cautious or conservative portfolios which are aimed at generating a steady income and less volatility.
Given their higher potential returns, growth strategies are also more likely to ensure money outpaces inflation — this is important if an investor is planning to maintain their same level of spending in retirement.
2. Cautious investment strategy
A cautious investment strategy is designed to give a more balanced risk and return outcome by generating some level of growth, with less fluctuations than a growth strategy.
It would typically suit an investor who has a medium to long investment timeframe and would normally include a portfolio invested equally in growth and defensive asset classes.
3. Conservative investment strategy
A conservative investment strategy is not as focused on growth. Instead it aims to generate a steady income and more stable value by insulating investments from share market volatility.
It is important to note however, that while this is considered a more conservative approach, historically this strategy has only earned returns slightly better than inflation in the long run. As such, an investor with a conservative strategy may struggle to maintain their same current standard of living in retirement.
This approach could suit an investor who has sufficient retirement savings and is looking to access their super within a few years. They may therefore desire security as opposed to growth.
Due to the low level of risk, a conservative investment portfolio would have only 20-30% exposure to growth assets with approximately 70-80% invested in defensive assets.
Seek support from a professional
We can help design a plan to achieve personal financial goals. Contact us on 03 6165 2666 for a better understanding about the risks and rewards of investing and how to better manage risk.
Source: MLC Insights January 2021
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