Life, as they say, is what happens when you’re making other plans.
Which is why, a couple of weeks ago, IÂ wrote about choosing the right Super fund, and told you I’d be back soon with the second part of that story. But…
‘Soon’, as it turns out, isn’t as soon as I wanted it to be, but at least we finally made it back.
Last time, I ran through both ‘pooled’ Super funds (Retail and Industry Funds) and SMSFs, with some thoughts as to when each might be worth considering, based on the financial circumstances and interests of the member.
And, as I said last time, choosing the Super fund is like choosing a house to buy. The next step is choosing the furniture.
Where am I going with that clumsy metaphor? Well, the Fund gives you the structure. The next step is to choose how the money inside the fund will be invested.
Choice can, of course, be wonderful, but it can also be incredibly difficult and make life much more complex.
There are scores of choices right across the Superannuation spectrum, but we can break them down to only a few major categories, and that’s what I’m going to help you work through today.
Now, when you join a Superannuation fund, if you don’t make a choice, you’ll be put into the fund’s MySuper option. That’s generally what they call a ‘balanced’ option which has a mix of Australian shares, international shares, property, bonds, cash â pretty much the plain vanilla, don’t-scare-the-horses, option.
No surprises, lower volatility, and a pretty good, if not great, potential return.
Then there are other pre-mixed options, the most common of which will be ‘conservative’ or something similar, and ‘growth’ or ‘aggressive’.
The idea is that a so-called conservative investment option won’t be anywhere near as volatile, and will probably be in positive territory most of the time, but also probably won’t give you the best long-term return.
High growth or aggressive, on the other hand, will likely be far more volatile, at least compared to the conservative option. The thing is, by being concentrated in growth assets like Australian and international shares, for example, you also should expect a much better return over the long term.
Essentially, the options that are provided give you a trade-off â even if you don’t realise it â between the size of your long-term return and the degree to which any individual month or year varies significantly from the average; and even how frequently your overall Superannuation balance goes down.
So there are two parts to choosing the right option within Superannuation: the first is the sort of return you’re aiming for, and the second is your ability to sleep at night.
In fact, they probably should be considered the other way around.
The thing about investing is that unless you can stay the course, you’re probably not going to get the best returns. That means some people should probably make a more conservative choice so they can sleep at night⦠and not sell in a panic next time the market swoons. The trade off? You probably end up with lower overall returns.
Conversely, the best long-term returns are probably going to come from taking a little more perceived risk: embracing a little more volatility. But doing so by investing in assets â usually shares â that are going to give you a superior long-term performance.
At this point, I want to remind you about life expectancy.
No, I’m not going to get macabre, in fact, exactly the opposite.
Too many people, when they think about Superannuation, think about retirement day. Maybe you’re 25 or 40 or 55, and you’re counting the years between now and when you stop working, and you think about your Superannuation balance in the same context: “I will get my Super when I retire” is often the perspective most people bring to their investing.
The thing is, if you’re 40 today, there’s every chance, according to the actuaries, that you’ll be retired for longer than you have left to work. In other words, retirement is not the end of your Superannuation journey.
In fact, it may not even be halfway between now and when you finally shuffle off this mortal coil, and your Superannuation has to last you for that whole time.
Don’t get me wrong, this is not a suggestion that you don’t spend money in retirement.
You absolutely should. You’ve worked hard and saved hard for what you want to get out of that retirement.
Instead, my reminder is that if you are to maintain your Super for years after you retire, you need to think about that as a growth period as well as a drawdown period. You want compounding to be working for you so you can generate the income you need, to let you live a comfortable retirement life.
Now there’s no single answer and no silver bullet. Everybody’s temperament, risk tolerance, circumstances, Superannuation balance, and life expectancy will be different and largely unknowable, at least in advance.
But the framework I’m suggesting hopefully puts you on the right path: that is, think about how many years you have between now and when you’re likely to take your last breath. Again, not to be macabre, but exactly the opposite: to maximise your ability to enjoy your life to its fullest between now and then.
Let’s go back to temperament first. If you are someone who simply can’t stomach volatility, you probably shouldn’t be investing your Superannuation in growth options. Now let’s be clear, you’re giving up some potential return in doing so, but at least you’re not going to get scared and sell everything at exactly the wrong time: when the market has an occasional unfortunate, but real, dip from time to time.
I’m not doing you any favours by trying to encourage you to get a better return if you can’t actually follow through.
But let’s say you can. Let’s say you can maybe even comfortably put up with it. What should you do?
Well, I’m not allowed to give you personal advice, but in general, if you’ve got 40, 50, 60 years left of life â not of work, of life â then I reckon most people should be thinking about investing in growth options within their Superannuation to maximise the returns over that long term.
Yes, the returns in any given year might be more volatile, but overall, I fully expect â there are no guarantees, but I fully expect â you will do well⦠and much better if you take a little bit more risk and invest in assets whose value grows over time.
Here’s how to think about it: few people are going to retire, access their Super, sell everything, and go on the pension on the same day. If you are, then knowing how much you’ve got at 65 or 67 is really important.
But if you’re going to slowly draw down your Super over your retirement years â and remember that could be 20, 30, or 40 yearsâthen your investment horizon is far, far longer than you may realise or have really internalised.
If you’re 40 and likely to live to 100, you have 60 years of investing ahead of you â probably three times as much to come as you have had so far.
In that case, isn’t your investment horizon much longer than otherwise might seem at first blush?
Now, in retirement you might still prioritise having some income from that portfolio or changing at some point how much of your money is invested in growth assets.
But given that timeframe, I hope it might also make you rethink how you’re structuring your investment choices, over both your working life and your retirement years.
So, depending on your temperament, growth probably should be the default for almost everybody, unless you need to draw down the capital â not just income, but the capital itself â from your Super upon retirement.
I should say here, by the way, that the usual disclaimer applies, both ethically and legally: past performance is no guarantee, and I can’t promise what the future will look like either. All I can tell you is that my Super remains in growth assets, and before my wife converted her Superannuation to our SMSF, her Industry Superannuation was invested under a growth strategy.
Are we good so far? Excellent. Stick with me⦠we’re almost there.
Now that I have you thinking about growth, I’m going to add one more option, and then we’ll wrap this up.
You don’t have to accept any or all of the pre-mixed options inside Superannuation.
The problem with the funds management industry in general, including Superannuation, is that there are plenty of snouts in this particular trough. It’s not even necessarily people doing the wrong thing, they just are all extracting their fees for the work that they’re doing, and you’re paying the bill.
So yes, if you don’t want to choose, or don’t know how to choose, how your Super is invested, these pre-mixed options are good choices. However, you can generally get a very good, and very likely better, outcome by making a few simple choices yourself.
Rather than accepting a relatively high-fee growth option, for example, most Superannuation providers will allow you to select specific Exchange Traded Funds (ETFs). So, for example, rather than choosing the ‘growth’ option inside your Superannuation, you could choose to invest your Super in an Australian shares ETF, a US shares ETF, and/or a global shares ETF.
Again, you have to decide what’s right for you, but you’ll find the fees are almost certainly far lower in that circumstance than accepting one of the pre-mixed options â because those pre-mixed choices are usually invested with other fund managers who take their clip of the ticket. By self-selecting low-fee ETFs, you still pay an investment fee, but it’s incredibly tiny. You’re not paying for a fund manager to make those decisions on your behalf.
Now, if a fund manager can beat the market, they might be worth the fees you will pay. But in a pre-mixed option, are you likely to beat the market? If not â or if you don’t know â you may find that self-selecting some very low-fee ETFs is a much better way to go.
So let’s bring this to a close.
If you want to have an SMSF and choose your own stocks or indeed assets outside the share market, go for it. If you’re built for that and think you can do it successfully, an SMSF can be a great tool.
If not, here’s what I reckon probably presents the best long-term return for people who have the ability to stay the course:
If I wasn’t going to pick stocks, I would have my Superannuation in a large, low-cost, not-for-profit Superannuation fund, either an Industry fund or another not-for-profit Super fund.
And if my money was in that not-for-profit fund and I wanted a pre-mixed option, I would choose growth.
If I was comfortable to not go with a pre-mixed option â because I wanted to maximise my chance of the best return while keeping my fees low â I would direct my Super fund to invest my Super in a few low-cost, broad-based index ETFs: Australian, US and Global shares.
And that’s as simple and as hard as it needs to be.
Keep your fees low, choose short-term volatility as the price of (likely) higher long-term returns, add regularly, and invest right through your working life and keep investing through your retirement.
For many people, perhaps most, that probably means choosing plain vanilla index ETFs inside not-for-profit Superannuation funds.
Phew, this was long. So was the last one. And believe it or not, both were as simple and as short as I could make them without only giving you part of the story.
Remember, it’s not a prescription. I hope what I’ve given you instead is a way to think about making sure your Super is in the best fund and invested in the options that make most sense to you based on your circumstances, including your tolerance and comfort with volatility. And I hope I’ve encouraged you to be a lifetime investor, not just a working-life one.
After all, that’s what good investing is.
Fool on!
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
