Rebuilding your super

There are ways to take control of your superannuation. We answer your most frequently asked questions.
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02.Safer options

Can I switch to safer options?

If you’re tempted to switch to safer options within superannuation, it’s important to know which investments are genuinely safe in this rocky climate.

You might assume funds with the following names to be safe:

  • Conservative
  • Defensive
  • Capital safe
  • Secure
  • Fixed interest
  • Capital guarded

However, data from the research house SelectingSuper found that in 2008, “capital stable” super funds, for example, lost on average 8% of their value. Some had up to 55% in so-called “growth assets” such as shares and property, but only a handful of the 100 or more funds in this category had a positive one-year performance. Five-year performance was better, at about 4% per annum.

On the other hand, the funds that fall into SelectingSuper’s “cash” category, which usually invest in safer bank deposits and government bonds and do not diversify into shares, returned more than 5% in 2008. So somebody who invested their balance in cash instead of the average capital stable option early in 2008 would have had 14% more by the end of the year.

Those invested in the somewhat riskier “fixed interest” funds, offered by large super funds, returned 8% in 2008 (and about 3%-4%pa over three and five years). These funds invest in government and company bonds, debentures and other interest-paying securities. They’re generally conservative, but there’s a chance of negative returns in some years. Some put a portion of money into assets that aren’t considered “investment grade”, such as emerging market debt.

Bear in mind, fixed interest does not refer to the high-risk mortgage funds and debentures that haven’t been assessed by ratings agencies – some in that category have collapsed in recent years, losing investors billions of dollars.

In short, you cannot rely on the names or labels on funds if you’re looking for a low-risk option. You need to dig deeper to find out where they invest.

The table, below, compares two industry funds and illustrates how the term “balanced” is interpreted differently. The REST balanced fund invests 55% in growth assets such as shares and property, while CareSuper’s balanced fund invests 75% in those assets. This goes some way to explaining the difference in short-term performance. Problems around labelling cross all superannuation funds (corporate, government, industry and retail) and categories (conservative, balanced, growth and others) and not just industry funds’ balanced options.
Why fund names are meaningless

Can I manage the downturn?

While switching to cash can reduce volatility and stem further losses, it may not be a sensible decision in the long term. If share markets eventually pick up, switching out of a balanced or growth fund now could leave you worse off later. If you do switch to cash now, you may need to consider a strategy to move some money back into growth assets in the future. The trouble is, timing the highs and lows of markets is notoriously difficult and missing out on the best days of a recovery can be costly. For example, between 6 March and 17 April 2009 – just five weeks – the Australian share market rose by 20%.

Diversification is a key risk-management strategy. If you choose to put all your eggs in one basket, you could lose almost everything, particularly if the investments are poor. This happened to DIY investors who invested in property-based investment schemes such as Australian Capital Reserve, Bridgecorp Finance, Fincorp and Westpoint. Investing in just one or two companies’ shares is also risky. Several of our largest 200 companies lost over 90% of their share value in the last two years, including ABC Learning and Babcock & Brown, which is in voluntary administration.

Paul Gerrard, a South Australian adviser and former director of the Financial Planning Association, suggests a well-diversified portfolio that includes fixed-interest investments, property investments and investments in shares in Australia and overseas, as well as making sure the portfolio is managed by a number of independent and reputable managers with good track records.


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