Choosing the right option

Picking the right investment option is important. Here’s some things to consider first, and a few tips.

What type of investor are you?

How you choose to invest your money will depend largely on the type of investor you are. When it comes to super, there are three key considerations in choosing the right investment for you:

  1. How long you’re investing for
  2. How hands-on you want to be when managing your super
  3. How much investment risk you're comfortable with

1. How long do you want to invest for?

Your investment timeframe is how long you want to invest and keep your savings growing in super. The younger you are, the longer your investment timeframe will be.

Of course, you can invest for however long you want. Even if you don’t know when you'll retire, thinking about your investment timeframe can help you choose an option that matches your goals.

2. How hands-on do you want to be?

Choosing the right investment can impact how much your savings grow and how long they last. Before making your choice, you need to know how much direct control you want over your investments – or how "hands-on" you want to be.

You can choose from three different investment options, each with a different hands-on level:

3. How much risk are you comfortable with?

Different investment timeframes and options come with different risk levels. An investment’s risk level largely depends on how long you invest in it.

  • Within a short timeframe (five years or less), the main risk to your investment is short-term fluctuations that could reduce your savings. 
  • Investing over a longer period (20 years or more) means that your investments will probably have time to ride out short-term ups and downs. Your main risk over the longer term is keeping up with inflation. 

Different types of assets also have different levels of risk. Consider how you might offset this risk by selecting diverse investments.

  • Types of risk

    Adequacy

    This is when you don’t have enough super to meet your needs when you retire. It’s similar to longevity risk, which is the risk that you outlive your retirement savings.

    Volatility

    Also called market risk. Market fluctuations can cause the value of your investment to rise and fall. Volatility is sometimes measured by how often you can expect to receive a negative annual return within a particular period of time.

    Inflation

    Your investment returns don’t grow enough above inflation to meet your long-term objectives.

    Market timing

    The risk that you buy or sell your investments at the wrong time. For example, if prices are low when you sell you may lose money. If you wait until prices pick up before you buy, you might miss the market upswing and it might take longer for the value of your investment to grow. This can be a risk when switching investment options.

    Currency

    Movements in exchange rates can impact the value of your investments. For example, an increase in the Australian dollar compared to other currencies can reduce returns on international investments. A lower Australian dollar can improve returns.

    Interest rate

    Interest rates movements can impact your investment returns. While lower interest rates are usually good for the economy, they can lead to low returns for investors relying on cash for income.

    Liquidity

    The risk that your investment can’t be sold at the right time or when you need your money.

    Agency

    The risk that the third parties who manage investments and the administration for AustralianSuper do not perform as expected.

    Credit

    Also called counterparty risk. This is the risk that the issuer of a security (like a bond) doesn’t pay back the money borrowed when it is due.

    Policy

    The risk that changes to super rules and industry regulations will impact your investment.

  • Standard Risk Measure

    The short-term risk level is the same as the Standard Risk Measure, which is used across the super industry to help members compare the risk levels of investment options.

    The short-term risk level classifies investment options according to their likelihood of negative returns.

    The short-term risk level is calculated by:

    • Estimating the probability of an investment option delivering a negative annual return in any one year and multiplying this by 20. This provides an estimate of how often you can expect to receive a negative annual return in any 20 year period. Calculations are based on the Rice Warner modelling described below.
    • Investment options are then categorised into risk levels and bands based on their expected frequency of negative annual returns as follows:

     

    Risk level (label) Number of negative annual returns over any 20 year period Risk band
    Very Low Less than 0.5 1
    Low 0.5 to less than 1 2
    Low to Medium 1 to less than 2 3
    Medium 2 to less than 3 4
    Medium to High 3 to less than 4 5
    High 4 to less than 6 6
    Very High 6 or greater 7

     

  • Medium-term risk level

    The medium-term risk level is a combination of the short-term risk level and the long-term risk level.

    Over the medium term, both volatility and inflation can be a risk so you may need to find a balance between the two. While you have a longer period to recover from potential market falls there is still a possibility that your super savings could be reduced by market volatility. At the same time, you may need to choose an option that has the potential to grow your super savings above inflation over time to meet your objectives.

  • Long-term risk level

    The long-term risk level is determined by considering the likelihood of investments in each option to produce returns in excess of inflation. 

    Each option is given a rating from the following table.

     

    Risk level Probability of underperforming inflation
    Low Less than 10%
    Low to Medium 10% to 20%
    Medium 20% to 30%
    Medium to High 30% to 40%
    High 40% to 60%
    Very High Greater than to 60%

     

  • Investment return assumptions

    The risk levels are based on investment return modelling conducted by Rice Warner. The model takes into account a wide range of economic and investment market factors including inflation, expected asset class returns, volatilities and cross correlations between asset classes. It is based on and calibrated against Australian and international experience, often going back over 40 years. For unlisted/alternative assets, where historical data is limited, a range of proxy measures are adopted and overlayed with knowledge and judgement to calibrate their return distribution.

    Where necessary, asset class returns have been adjusted to take into account the characteristics of AustralianSuper’s investment portfolios. We have assumed that each PreMixed option is rebalanced to its Strategic Asset Allocation each year. The risk profile of an investment option may change from time to time due to tactical tilts within the portfolio.

    The returns are net of contributions and earnings tax and investment fees (excluding investment performance fees). Fees are indexed annually to price inflation using the CPI and contributions are indexed to wage inflation. Unusual future events may cause different results.

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Managing risk over the short and long term

Your investment time-frame is a factor when considering volatility risk. While Cash has been steady over the last 20 years, it's also grown less than assets like shares. If your savings are growing too slowly, they might not keep up with the rising costs of living. 

Australian shares grew strongly over the same period of time, but if you look at just one year (such as 2009) you can see that shares can be risky as well as rewarding.

cash-vs-australian-shares-performance-graph
The information in this graph has been prepared using data from the following market indices: Australian shares – S&P/ASX 300 (All Ordinaries before 1/4/2000); Cash – Bloomberg AusBond Bank Bill Index. The amounts shown are calculated to 30 June 2016.

Our top five tips for managing risk

1. Focus on your long-term needs

It can be tempting to change options when markets are down, but you may be better off staying put. Investments that fluctuate over short periods usually grow more over the long-term.

2. Protect yourself with diversification

By spreading your investments across a variety of companies and industries in different asset classes, you’ll minimise market fluctuations that effect your savings.

3. Stick to your strategy

Market movements can make the asset allocation of your portfolio move away from its original strategy and change your risk level. In our PreMixed options, actively adjust this for you. If you invest in our DIY Mix options or Member Direct, you’ll have to manage this yourself.

4. Review your strategy

When your circumstances or objectives change, you should consider reviewing your investment options. As you get closer to retiring, you might need to access some of your super sooner.

5. Seek financial advice

The best option is the one that suits your investment timeframe, circumstances and goals. A professional financial adviser can help you develop a strategy to meet your needs, which could make a big difference to your retirement savings over the long term.

Investment guide - pdf, 3.6MB

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