Most superannuation funds let their customers choose how their superannuation balance is invested, usually in one of two ways: ‘investment strategies’, or by specified asset allocation.
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The former option involves choosing one of several ‘investment strategies’, which are usually labelled along the lines of:
- Conservative (safe but smaller returns, a good option for those close to retirement who can’t afford to gamble with their super)
- Balanced (a reasonably even mix of safe and risky asset classes, good for someone who wants higher returns but less risk)
- Growth (an asset mix engineered for maximum returns, but which carries more risk than the previous two strategies)
However, while you get some degree of choice by choosing an investment strategy, you can find yourself presented with relatively inflexible and pre-determined asset selections. This means you may either not end up getting the best returns possible on your investments, or find yourself spending money in industries you’d rather not support financially. (Here’s our guide to ethical investing through superannuation.)
If you want to fully customise the mix of assets your super balance is invested in, and the proportions of your balance that are invested in each asset, you may wish to get involved in asset allocation.
How should I allocate my super investments?
Obviously the assets you choose to invest in are completely up to you, as are the amounts that you invest in each of the assets that you decide to go with.
But while there’s no ‘one size fits all’ approach to smart investing, there are a handful of commonly cited guidelines that may be worth considering if you’d like to navigate your way forward with an asset allocation strategy.
One relates to ‘growth assets’, – asset classes that are high-risk and high-reward such as shares and property, and is as follows. It states that if you subtract your age from 100, the result is the percentage of your super portfolio that should be made up of growth shares.
This rule is based on the basic premise that younger people (who would end up with a higher percentage of growth assets with this approach), have more time to ride out any crashes or downturns that their investments might go through.
Speaking to Crikey, Castellan Financial Consulting Managing Director Bruce Brammall said that “people in their 20s, 30s or even 40s should have 70% to 100% of their fund in property and shares, and the remainder sitting in cash and fixed interest.”
However, some experts believe a more diversified approach is important because of the financial risk that putting all your eggs in only a few baskets can carry.
Also speaking to Crikey, Pitcher Partners Director of Superannuation Services Tracey Norris said that “to have all your resources in one place puts you at greater risk of losing everything if the plan goes awry… you should limit your exposure to complete investment failure,” Norris says.
That being said, Norris offers the following rule-of-thumb ratios for asset allocation at different points in life:
| Investor | Growth assets | Safe assets |
|---|---|---|
| Gen Y | 80% | 20% |
| Gen X | 70-80% | 20-30% |
| Baby Boomers | 50-60% | 40-50% |
What are are the benefits of asset allocation?
To demonstrate the difference that optimal, or even slightly improved asset allocation can possibly make to your superannuation balance over time, consider the following figures based on research from AustralianSuper that projects various super balances for a person retiring in 40 years with an annual income of $52,000 and $24,000 in superannuation.
| Investment option | Proposed standard risk label | Projected most likely balance | Projected maximum balance | Projected minimum balance |
|---|---|---|---|---|
| Cash | Very low | $175,925 | $203,443 | $151,312 |
| Balanced | Medium to high | $354,178 | $670,936 | $188,092 |
While these projections don’t account for the several different asset classes and combinations thereof you can invest in through your super, they help illustrate why asset allocation can be worth considering.
At the end of the day, your personal asset mix will depend on where you are in life, and more importantly, your personal appetite for risk and what you feel comfortable investing your money in.
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