Metric in the media
I was lucky enough to be featured this week in the Sydney Morning Herald, talking about Super and investment risk. You can read the full article HERE
Obviously my full commented made the cutting floor of the editors office (which is fair enough, it’s not an article about me) so I thought I’d share with you the questions I was asked by Journalist, Simon Webster, and the answers I gave in full in this weeks update.
How important is it to choose an investment option within super that's right for you, rather than just pick the default and set and forget?
Settling for a default option can cost a saver thousands of dollars over the long term, either by not producing enough growth to build a sufficient fund by retirement, or by accepting a higher cost investment that can eat into your returns.
What factors do you need to consider when choosing an investment option? Eg goals. Risk profile.
Try to pick your investment by its contents, not what it is called. A fund marketed as ‘Balanced’ could have half their money in the stock markets or they could have over 90%. Simply comparing them by name and return is not comparing apples with apples. Generally, the more exposed to global stock markets a fund is, the greater the return will be over the long term – but be aware it will be a bumpier ride than more cautious options like cash or bonds.
If you are just entering retirement, it doesn’t mean you should switch straight down to a ‘Cautious’ investment option. The average life expectancy at retirement is over 20 years and rising. You still need growth to make your money last as long as possible, and with the current low returns on cash and bonds, a cautious portfolio will likely be depleted very quickly and not keep pace with the inflation you’ll see in your day-to-day costs in retirement.
What is a risk profile and how do you know what yours is?
When we talk about risk in risk profiling, most advisers are trying to see how you would react to volatility in your Super portfolio. Whilst there are several online profile tools and questionnaires, you might reflect on your own actions last year when the market fell significantly. How did it make you feel? How regularly did you check your Super? With hindsight, would you have acted differently?
In a volatile market, how important is it to think long term rather than overreact - e.g. by changing your investment option to cash - when the market falls?
On average, the global stock market rises every 3 out of 4 years. Gaining a meaningful return is just a numbers game - the upsides will outnumber the bad over the long term, but we have no idea when the temporary declines will be.
Switching to cash in a downturn means you need to guess correctly twice – once on the way out and again on the way in. You’ll never get it right, so don’t try!
How often should you review your investment option and what factors might make you change to a different option?
The more often you change your investment option, the more likely you are to receive a poor lifetime return.
Review all your finances, not just Super, annually but a review doesn’t mean you need to make a change.
It is better to start with a fund that has a lower stock market exposure and each year increase that exposure, than to go the other way, start high, panic and sell.
Taking professional advice to ensure you make the correct decisions when markets are volatile can give you the confidence to hold a fund with higher exposure to the stock markets.
