One of the key advantages of superannuation is also seen as one of its key disadvantages. Many people complain that they can’t access their superannuation until they retire, but this rule also means that your super account’s investment earnings are reinvested 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 at any time.
Set out in this beginner’s guide to super investing, is a brief outline of how investing works, and how your super fund invests. At the end of this article, we provide links to other SuperGuide articles that explain how super funds invest in more detail, and how you can choose or change investment options, and benchmark your super fund. We also provide links to the latest investment returns delivered by super funds, and the links to the top performing super funds.
Note: 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 bank account balance, then your account can be considered an investment because the bank account is generating a return in the form of interest. Depending on what level of interest (return) the bank pays on your account, you may consider it’s a good investment or bad investment.
Doubling your money is all about time
The easiest way to accumulate wealth over time is by reinvesting the earnings from your investments. You can then earn more interest (or investment earnings) on your interest, which means your investments grow faster over time.
Want to double your money? Depending on the risk that you’re willing to take, you can double a one-off investment in 4 to 5 years – though it is more likely to take between 7 and 10 years, assuming you re-invest your earnings. By re-investing your investment earnings, your initial investment benefits from the effects of compound earnings. For more information on how long it takes to double your money, see SuperGuide article The Rule of 72, and how it can help you choose an investment.
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.
Note: If you’re also willing to make regular contributions to your super account, or other investments, then your investment portfolio will double in value at a faster rate, assuming the investment market are performing well (for information on making super contributions, see our special guide Making superannuation contributions: A Super Guide , and for information on your employee super entitlements, see SuperGuide article Superannuation Guarantee rules for employers).
Higher returns mean higher risk
A long-term average annual investment return of 7% after fees and taxes on your superannuation account, will usually mean that your super money is invested in a balanced or growth investment option (see SuperGuide article Superannuation investment: What is the difference between a balanced and growth option?).
Most Australians have their super money in a balanced/growth investment option, which usually involves a larger proportion of shares, property and other higher risk assets, and a smaller proportion of cash and lower risk investments such as fixed-interest investments.
The general rule is that the higher the return you aim for, the greater the 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 Australian 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 known 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. For more information on investment options, see the special SuperGuide section, Choosing an investment option (Investment choice).
Understanding your risk profile
If you are willing to accept the occasional 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 but also deliver lower returns over time. If you fit into the more conservative, risk-averse strategy, then you’re likely to be described as having a low tolerance for risk. For more information on understanding your risk profile, see SuperGuide article Want investments that help you sleep? Understand your risk profile.
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, which many members of super funds experienced during the Global Financial Crisis that hit investment markets during 2008 and 2009. Some investors also count risk as missing out on a higher return on another investment.
Having money in 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 person’s 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, three high-interest bank accounts, two investment properties, and shares in 12 Australian companies listed on the Australian Securities Exchange.
If you want a return higher than the interest you earn on a bank account, then any investment you choose will generally hold greater risk than a bank account, Over time, however, it should also deliver you higher returns. Many investments that deliver higher returns can have a bumpy performance from one year to the next, so you generally expect to hold higher risk assets for 5 years or more so the strong years outweigh the years of not-so-strong performance.
Your super fund also makes investments. Many Australians, and most super funds expect to invest money in higher risk investments, such as property and shares. Such 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 and shares can lose money
The challenge is to balance the risk of potentially losing money with the ultimate aim of delivering decent long-term returns. 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 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 known as asset allocation.
For more information on how super investing works…
For more information on asset allocation, investment choice and other super investment topics see the following SuperGuide links:
- What is the default investment option?
- Working out your risk profile
- Choosing an investment option (Investment choice)
- Switching superannuation investment options
- Responsible investing
- Retirement investment options
- What do SMSF trustees invest in?
For more information on super funds and investment performance…
For the latest performance results from super funds, and the best-performing super funds, see the following SuperGuide articles:
For more information on the top-performing superannuation funds for the latest financial year (and previous financial years) see the following SuperGuide articles:
- Top 10 performing super funds for 2017/2018 financial year (and previous years)
- Top 10 performing super funds over 10 years (to 30 June 2018)
- Asset classes: Naming the investment winners for the 2017/2018 financial year (and previous years)
- Super funds gain 9.4% for 2017/2018 financial year
- Super and pension funds with the lowest fees
For more information on the top-performing superannuation funds for the latest calendar year (and previous calendar years) see the following SuperGuide articles:
- Top 10 performing super funds for 2018 calendar year (and previous years)
- Top 10 performing super funds over 15 years (to 31 December 2018)
- Asset classes: Naming the investment winners for the 2018 calendar year (and previous years)
- Super funds return 0.8% for 2018 calendar year
- Super and pension funds with the lowest fees