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Superannuation: The stay or leave decision


Every Issue

Cite as: (2009) 83(04) LIJ, p.84

It’s natural for superannuants to reconsider the investment option they’ve selected for their super in light of the continuing financial crisis.

Superannuation is in essence just a tax-effective way to invest for the long term.

Superannuants can decide where their money is invested by selecting an investment option or combination of options, with each option having different growth prospects and associated risks.

Recent falls across world sharemarkets have made some superannuants nervous, wondering if they should stick with or switch their investment option.

By changing investment options you effectively move your money from one mix of investments to another. In doing so you crystallise the value of your investments and then plot a different path for your retirement savings with different growth prospects and associated risks.

Before taking this course of action you should consider the following points.

  • A long-established investment principle says that you should choose a long-term strategy and stick to it. Sound investment strategies recognise that markets decline every few years, but also that declines are usually followed by recovery. By holding true to your strategy you will be better placed to ride out a decline and see your investments return to a growth phase.
  • Most people have a long investment timeframe that enables them to ride out current volatility. Even someone nearing retirement may be able to keep their money in super for as long as 20 years while they draw an income from a superannuation pension.
  • When markets finally return and make gains they often do so over a small number of quite short periods. Consequently, timing investment markets and predicting when these gains will occur is notoriously difficult, particularly in volatile times like we are experiencing.

If you switch to a lower-risk but lower-growth oriented investment with the intention of at a later time moving back into growth assets when things have stabilised, you will then be confronted by the need to decide when it is the right time to move back in. Considering the aforementioned difficulty in timing markets, choosing when to return is difficult and there is every likelihood that you will miss the upturn when it occurs.

  • If you decide to switch investments because of nerves and you want to head into safer waters such as “cash” for the sake of allaying your fears, it may already be too late. By the time most investors start to think a fall may be occurring, often it already has. Selling or changing strategies during a decline is far from optimal, particularly for long-term investors.
  • If you still feel that a change to your investment option is necessary, here are four principles to help you choose a new option.
  • First, understand the risk versus return trade-off. A trade-off exists between the risk (the degree of security and volatility provided by an investment) and the investment return from the investment option you choose. Lower risk generally means lower long-term average returns. Higher risk generally means potentially higher average returns in the longer term, but a greater risk of volatility and negative return, particularly in the short-term. Many investment managers and super funds can provide you with a risk profile questionnaire to help you gauge your tolerance of risk.
  • Second, consider the length of time over which you are planning to invest. This will affect your investment decision. If you are about to retire and redeem your super, you may prefer to invest in a way that minimises volatility. If your super investment is for the longer term, you may prefer to take a greater risk with the objective of achieving higher average investment returns over the long-term.
  • Third, sleep on any decision before implementing it. If the investment option keeps you awake at night you are probably taking too great a risk.
  • Finally, if you’re ever in doubt seek advice from a registered financial planner or call legalsuper and speak to one of our consultants on ph 1800 060 312.

ANDREW PROEBSTL is chief executive of legalsuper, Australia’s largest super fund dedicated to the legal profession. He can be contacted on ph 9607 9401 or aproebstl@legalsuper.com.au or see http://www.legalsuper.com.au.

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