Bringing understanding to your investments
It surprises me how much faith people have with their superannuation investments, especially those with Industry Funds. Much of this is predicated on fairly decent average returns over the last 10, 15 and 20 years and reflects the growth in prosperity of much of the developed world. Generally, comparable retail investment funds have achieved similar returns though it’s almost impossible to do a fair comparison because of the diverse range of underlying investments that can be used by an adviser to create a portfolio. No two funds are exactly the same.
Investment Results Complacency
Because of excellent long-term average returns, there’s now a great deal of complacency that investment results will continue as they have in the past especially since many superannuation portfolios have 65% or more allocated to Australian and International share markets. While it’s true that investment risk actually reduces over longer periods such as ten years or more this doesn’t mean that we can rest easy. A good example of this is when preparing to retire and there’s a distinct change in the investment philosophy from accumulating savings through working life to using savings to fund lifestyle costs. This is commonly referred to as the draw down phase. So, if share markets fell 20% (which is not considered to be a large fall) and you’re relying on your capital to meet living expenses, this can have a dire impact on the longevity of your retirement savings. This is a tricky situation and it’s for this reason that those near retirement, as well as those who are retired, should take a greater interest in their investment accounts so they are informed and in the position to make appropriate decisions.
Please remember this – just because an investment has done well in the past is no indicator of future returns. Please read this again.
If this is the case how do you know what to do?
- First, know what your attitude to risk is. This means identifying your tolerance to negative returns, especially if you are retired and relying on your investments. An effective way to do this is by completing a risk profile questionnaire.
- The results of the risk profile questionnaire will assist in developing your investment asset allocation, which in simple terms, is the proportion of your savings invested between growth and defensive type investments. We can not stress enough that this step and the first step are the most important. Defining your allocation to the asset classes will provide around 80% of the predictable return of your portfolio. If you’re relying on your investments to provide retirement income then this is a separate and very important consideration in creating a well-diversified investment portfolio.
- The most effective way to diversify your investment pool is to use all of the major asset classes. No one asset class performs the best all the time. For example, over the last year it was Australian shares, over the last 2 years it was listed property, International shares for the last 5 years and surprising to many, fixed interest securities have out performed all asset classes over the last 10 years.
- Be disciplined by reviewing and rebalancing your investment portfolio annually so that the asset allocation (step 2) matches your initial risk profile. The key point here is discipline. I’m sure we all know plenty of life examples where those who are disciplined in what they do achieve remarkable results. Investing is no different.