The first step to maximising your superannuation balance involves choosing the right super fund. Every year, typically around July or August, I publish a blog where I compare the top super funds and identify the best one/s. This comparison can guide you in selecting the best fund for you.
After selecting the optimal super fund, the next decision is how to invest your super. This choice is not always straightforward, so I thought it best to provide further guidance on this important decision.
Pre-mixed investment options
Most super funds provide pre-mixed investment options categorised by their allocation between growth assets (such as shares, property, and infrastructure) and defensive investments (such as cash, bonds, and fixed-interest securities).
- High Growth: Typically allocates more than 90% to growth assets.
- Growth: Usually between 75% and 85% in growth assets.
- Balanced: Generally, allocates between 65% and 75% to growth assets.
- Conservative: Typically allocates less than 65% to growth assets.
The greater the allocation towards growth assets, the higher the potential volatility of your portfolio. This means your super balance could fluctuate significantly from year to year. In fact, with a substantial exposure to growth assets, you should expect a negative return (a loss), about once every five years.
The theory regarding investment options
Investors should consider two key factors to decide which investment option for superannuation suits them best:
- Risk tolerance: This relates to how comfortable you are with your super balance fluctuating in the short term – more on this below.
- Time horizon: If retirement is just a few years away, preserving capital is arguably more important than seeking high returns. Conversely, if you are 40 or younger for instance, you have a very long-time horizon, so short-term volatility is a lot less important than maximising long-term returns.
Beware: There are no set rules
There is no standard definition for when an investment option should be labelled as conservative, balanced, growth, or high growth. Take, for example, Hostplus’s balanced option, which allocates 76% to growth assets, while Vanguard Super’s Balanced option invests only 50% in growth assets – that is a huge difference for something that uses the same label.
In recent years, I have noticed that many super funds have increased their allocation to growth assets to make themselves look better, especially since share markets have delivered strong returns. For instance, if Super Fund A allocates 60% to growth assets and Super Fund B allocates 75%, of course, Super Fund B would appear to have outperformed over the last decade. The ability to advertise higher returns would likely attract more members to join the fund, which is their goal.
However, this is misleading, as it doesn’t account for the difference in asset allocation. I believe the government regulator (APRA) should step in and require super funds to adhere to clearer, predefined definitions.
Therefore, when comparing super funds, it’s crucial to ensure you are comparing apples with apples by reviewing the asset allocation. Funds like Hostplus and ART may advertise themselves as top performers in the Balanced or Growth categories, but their strong performance is reflective of their more aggressive asset allocations. When you break down the performance of individual asset classes, such as Australian or International shares, these funds are not the best performers over the past decade.
Long-term returns are more important than volatility
If you’re 50 years old or younger, you will not be able to access your super for at least another decade. This gives you a relatively long time horizon. In this case, I would argue that investors should focus on maximising long-term investment returns, even if it means enduring higher volatility, which is likely. If volatility makes you uneasy, the best approach is to avoid checking your super balance more regularly than a few times a year.
Last year, I wrote a blog suggesting that people in their 20s, 30s, and 40s would likely be better off investing 100% of their super balance in the share market. I compared the returns over the past 30 years, and the results were clear: growth assets have delivered about double the returns of defensive assets. While investing 100% in growth will certainly be more volatile, the overwhelming evidence shows it offers the highest probability of maximising your super balance by the time you reach 60. After all, the safest strategy, in my view, is the one that grows your super the most by retirement age.
Even after 60, long-term returns are still important
Once you have enough wealth to fund your retirement, preserving capital can become more important than chasing higher investment returns. This typically means adopting a more conservative asset allocation.
However, if you are not confident that you have enough wealth for a comfortable retirement, being too conservative with your asset allocation can actually be riskier. In this case, your money might not last as long as you would like. So, in some situations, it may still be appropriate to maintain a relatively aggressive asset allocation in retirement such as Balanced, especially if the goal is to maximise long-term investment returns and make your money last as long as possible.
Common mistakes to avoid
There are a few common mistakes I often see people make when it comes to investing their super.
One mistake is using a combination of pre-mixed investment options, like investing half of their balance in Balanced and half in Growth. To me, this does not make much sense. It suggests that neither asset allocation is fully appropriate for their risk profile, so they try to compromise by mixing them. I’m not sure you can ever measure someone’s risk profile so accurately. While this approach might slightly change the overall asset allocation, I do not think the differences are significant. I prefer to keep things simple and let the super fund’s investment committee (the experts) manage the asset allocation. So, I recommend selecting the one pre-mixed option that suits you best and sticking with it.
Another common mistake is deciding on your own asset allocation. For example, some people tell me their super is split 40% in Australian shares and 60% in international shares. While this allocation could work, the problem is that no one is actively managing it. In addition, there’s no exposure to other asset classes like emerging markets, private equity, or infrastructure. It’s fine to go all-in on growth assets, but I believe it’s best to leave asset allocation and currency hedging decisions to the experts. For instance, my preferred super fund, UniSuper, offers a pre-mixed “high growth” option that is 100% invested in growth assets.
Some super funds also offer DIY investing options, where members can invest in direct shares and ETFs. My view on this is the same: unless you are receiving ongoing financial advice that covers your super’s asset allocation, stick with a pre-mixed option, and let the experts manage it.
Great content as always. When will you be doing your review of Vanguard, and in particular, their insurance products.
Hi Warren, normally my EOFY super review blog just looks at the investment side (fees and returns), but I might do a blog/episode just about Vanguard Super as insurance and other matters are important to consider too.