One of the key advantages of superannuation investing is also seen as one of the key disadvantages. Many people complain they can’t access their superannuation until they retire, but this rule also means that your super account’s investment earnings are invested regularly for a long time. Keeping your investment earnings in your super fund for 10, 20 or 30 years, or even longer, means you’re building a much bigger nest egg for your retirement than you could have achieved if you were able to withdraw your money any time.
Most super funds earn about 7% return. Compare that with the 17+% annual return with quality bricks and mortar. In 2018 your super fund earned an average of 0.4%.
The concept of saving, as opposed to investing, can often be confusing. For example, if you have your money in a bank account that pays no interest, then that bank account is not an investment. You may have savings, but those savings are not working for you, as an investment would. If, however, the bank pays interest on your account balance, your account can be considered an investment because the bank is generating returns in the form of interest. Depending on what level of interest the bank pays you on your account, you may consider it a good investment or an under-performing investment, just like risky shares.
Doubling your money is all about time.
The easiest way to accumulate wealth over time is by investing the earnings from your money. You can then earn more investment earnings which means your investments grow faster over time.
The annual average long-term return (over 25 years) on a superannuation account invested in a balanced investment portfolio is roughly 7% after fees and taxes. Based on this investment return, and assuming no additional investment (that is, no additional super contributions), the super balance should double in just over 10 years.
Over the last 26 years, our records show that Safe Super Homes is doubling the investments of our clients every 7.6 years
Higher returns mean higher risk – except for SMSF’s
A long-term average annual investment return of 7% after fees and taxes for shares on your superannuation account will usually mean that your super money in invested in a balanced or growth investment option.
Most Australians have their super money in a balanced/growth investment option, which usually involves money in riskier shares and other higher-risk assets, and a smaller proportion of cash and lower-risk investments such as fixed-asset investments and property. Normal super funds confuse you and don’t recommend ‘direct property’ which is only available in SMSFs.
The general rule when you invest in shares is that the return you aim for, the greater risk you take. Typically, higher risk superannuation investment options are called high growth or aggressive growth or something similar, while some investment options involve investing in only one asset class, such as shares.
The different categories of investments, such as cash, shares and property, are each known as ‘asset classes’. How a super fund divvies up your super money into the different asset classes is known as asset allocation. Most super funds let you choose from different asset allocations (which are know as investment options), such as conservative, balanced, growth, high growth or aggressive. Your super fund may give these options different names, which can be confusing. Recently, the law changed and now you are able to ‘roll-over’ your money out of the share market and into property and you must set up a Self-Managed Super Fund.
It is Australia’s immigration policy that is the major reason why real estate in Melbourne’s SE growth corridor gives a higher return, with more safety.
Understanding your risk profile.
If you are willing accept negative return (investment loss) in the pursuit of higher returns, then the investment world would describe you as having a medium to high tolerance for risk. If you want to avoid suffering any investment losses, then you would need to consider investments that are lower risk. If you fit into the more conservative, safer strategy, then you’re likely to be describes as having a low tolerance for risk.
Diversification spreads risk.
The return (also known as earnings, income and profit) from an investment is only one side of an investment. You also need to think of the risk of an investment – the possibility of losing your money, like in the 2008 Global Financial Crisis, which many members of super funds experienced. Some investors also count risk as missing out on higher returns on another investments.
Having money in a bank account in Australia is considered a low-risk investment, because you are unlikely to lose money, and is considered an attractive investment for part of a persons investment portfolio. An investment portfolio is the collection of investments a person may hold directly, or indirectly. An example of a possible direct investment portfolio could be, say, a high-interest bank account, two investment properties, and riskier shares in companies listed on the Australian Stock Exchange. This is how your current super money is invested by a complete stranger.
If you want a higher return than the interest you earn from a bank account, then any investments you choose will generally hold greater risk than a bank account. Over time, however, it should also deliver you higher returns. Many investments, particularly in shares, that deliver higher returns can have a bumpy performance from one year to the next so you should expect to hold higher risk assets for 5 years or more, so the strong years outweigh the years of not-so-strong performance.
But to me, this is ‘gambling’ your money away.
Your super fund also makes investments. Many Australians, and most super funds, expect to invest money in higher risk investments, such as shares. Share investments are higher risk because you are investing in business or assets that are subject to the ups and downs of economic cycles, and dependent upon the competence of the individuals managing those assets. Over the longer term, property and shares deliver higher returns than cash in a bank, but in some years property investments and shares can lose money. From my experience, hand selected property with a good manager is far better.
The same is true for Safe Super Homes, where property investor clients have seen property values double every 7.6 years.
The challenge is to balance the risk of potentially losing money with the ultimate aim of delivering decent long-term results. Most investors, including superannuation funds, balance the desire for higher returns with the possibility of losing money by investing across different asset classes (such as cash, shares and commercial property) and in a variety of assets within these asset classes.
This approach to investing is known as diversification. The way you, or your super fund, decide how to spread the risk across different assets is knows as asset allocation.
Are you keen to improve your and your family’s financial status?
Safe Super Homes are specialist financial facilitators. Kelvin and Clyde will educate you about all things you need to know financially and with safety. They have made many clients millionaires – at little or no cost – so long as you meet his well established and successful protocol.
Past economic performance may not be an indicator of future performance.