The market's in chaos - should I be changing my super investments? August 3rd, 2022
I have recently heard you speak about the importance of designing a portfolio of investments to reflect the risk and the time-frame for using the money. Because I plan to retire at the end of next year, I have switched all of my super to the conservative option that is within my superannuation fund.
I am not sure if this is what you meant and would be grateful if you can confirm that this was the right thing to do?
Can I get my question answered?
Most superannuation funds offer diversified or “mixed” funds which attempt to align the overall asset mix and risk of the fund with the member’s risk tolerance.
A capital stable, conservative or moderate risk fund typically has an underlying mix that allocates roughly 30 percent of the money to growth assets including shares and property. These are also the riskiest assets in the short term.
The remaining 70 percent is typically allocated to safer investments but not “safe” as you might expect. These investments include fixed interest investments such as corporate and government bonds. While they are typically quite stable, sudden changes in interest rates can have a dramatic short term effect.
These movements can sometimes be as volatile as shares, which can be quite unsettling. All of these underlying assets form part of the pool that makes up your diversified “conservative” option. The collective total value of all assets of the fund are priced daily and if any of those asset values change in a day, that results in a change in the unit price.
So while you probably have an appropriate mix, the unitised method means that your total fund moves up and down if any of the prices of any underlying assets change. Typically however, planners try to align the investment volatility and probable returns of specific assets with when the money is needed. This is very different to simply having a diversified investment option. We look at the statistical probabilities of being ahead when the money is actually needed.
If retiring late next year, a planner wants to be certain that money is there when needed and would typically keep a year or two of your required annual income in the cash option. No risk. The money to be applied towards the year 2 -5 objectives can reasonably be applied to medium risk safer investments such as bonds and the longer term money for 5 years plus, can be reasonably applied to the growth assets such as shares and property.
The real “trick” here is to regularly review these investments and when shares or bonds make profits, skim these across to the cash option to replenish the spending pool. Right now for people we look after? We’re not touching shares, because we already have the cash set aside.