Factsheet: Choosing a super strategy
ONLINE TEXT VERSION - July 2009
Super Factsheet #3
Are you a risk taker or do you prefer to take a safer path?
Maybe you're somewhere in the middle?
How you feel about taking risks can affect the investment
strategy you choose for your super, and how much money you end up
with. Remember that super is a long-term investment for your
retirement, so choosing the right strategy for your super money is
Nat gets a full-time job as an apprentice chef.
When you're young, it might suit you to choose a 'growth' or a
'balanced' strategy as you have time to recover from any negative
returns. Consider contributing some of your own money into super,
as you may get a co-contribution from the
government, if you earn under a certain amount.
Nat's restaurant business is booming. He's earning great
money. But he's starting to slow down and plans to retire
Consider making extra contributions to super to
boost your balance before retirement. Review your investment
strategy to ensure it's appropriate for your needs. Consider
getting personal financial advice from a licensed
financial planner about the best option for you.
If you don't choose an investment strategy, your super fund will
decide for you, sometimes called the 'default option'.
Your investment strategy
Most super funds let you choose between different investment
strategies or options. An investment strategy or option is how your
super money will be invested by the fund. Your fund's product disclosure
statement (PDS) explains how each strategy or option
works. This includes:
- how much money the fund expects to earn over time
- the risk involved - that is, the chance that the value of the
investments underlying the strategy will go down and you might lose
some of your money.
What investment strategies mean
Investment strategies/options are commonly grouped under four
broad headings: 'growth', 'balanced', 'capital stable' or 'capital
guaranteed'. Here's a rough guide to these rather loose labels.
Look out for how much is invested in shares or property compared
with cash and fixed
interest. Different investment strategies/options manage
risks and maximise returns by spreading your super money across
different types of investments. This is called diversification.
||What it roughly means
Invests 70-80% of your super in shares or property. Aims for
higher returns over the long term and so risks higher losses in bad
Historically, these higher-risk investments have earned the
highest returns over the long term.
||Invests 60-70% of your super in shares or property
with the rest in fixed interest or cash-based investments. Aims for
reasonable returns, but less than growth funds to reduce risk of
losses in bad years.
Invests 60-70% of your super in fixed interest or cash-based
investments with the rest in shares or property. Aims to reduce
risk of loss and therefore accepts a lower return over the long
Your capital and earnings can still be reduced by losses on
Historically, the more the fund invests in fixed interest and
cash, the lower the returns.
By law, invests 100% of your super with an Australian
deposit-taking institution, or in a 'capital guaranteed' life
insurance policy. Guarantees your capital and accumulated earnings
cannot be reduced by losses on investments.
Historically, this strategy has earned the lowest returns, only
slightly better than inflation.
Investment types (or 'asset classes')
Your super fund uses professional managers who decide what
investments to invest your super money in, in accordance with your
investment strategy or option.
Some investments are riskier than others. Higher risk
investments, such as shares or property, have the potential for
higher returns over the long term, but also a greater risk of
falling in value, resulting in a loss known as a negative return.
Investments with a lower risk, such as cash and fixed interest, are
safer, with less risk of losing money, although they offer lower
The following table shows the four main types of investments
that your super fund's professional managers may invest your money
in. The mix of different types of investments depends on your super
investment decisions (i.e. your investment strategy or option).
Shares: Australian and international
As a shareholder you are entitled to share in the company's
profits or earnings. These are called dividends and are paid from a
company's net earnings. Dividends are usually described as a number
of cents per share.
Money is made if the price of the shares has gone up when the
shares are sold. This is called a capital gain.
There is no requirement for companies to pay dividends from
earnings - some companies might choose to reinvest earnings back
into the business.
Money is lost if the price of the shares has gone down when the
shares are sold. This is called a capital loss.
Property: residential or commercial
Usually this is a long-term investment, because you hope that
the value of the property will increase over time.
There is a risk that the value of the property will decrease,
which means you make a capital loss.
Fixed interest investments
These investments offer a set rate of return over time for a
fixed period. For example, you might invest $5,000 for 2 years at
6% return. After 2 years, you will get your $5,000 back with
These investments are generally low-risk, although it depends on
where your money is invested. (For example, investing in
high-yielding company debentures is
vastly different from having a term
deposit with a bank or a managed
These investments usually offer a set rate of return and you
will get your capital back.
These investments are low-risk. They include term deposits with
banks or credit unions, cash management trusts and government
What you might choose
From your first job till you retire could easily be 30-40 years,
with perhaps another 20-30 years after you retire. Over that time
your living standards are likely to rise. Your investment strategy
is an important factor in how much money you end up with in your
For this reason, super's a long-term investment that usually
suits a 'growth' or 'balanced' strategy, investing in shares and
The trade-off for growth is losses in bad years. Over 30-40
years, it's likely that any growth strategy will lose money once in
at least 4-6 years. That will hurt, and when you get more than one
bad year in a row you may think you chose the wrong strategy.
Historically, over any 20-year period, a 'growth' or 'balanced'
strategy has been the only way to keep up with rising living
standards. You must decide if the likely rewards are worth the
A lower-risk, lower-return strategy ('capital guaranteed' or
'capital stable') could suit people who need greater security and
less risk; for example, if you're withdrawing all your super in
less than 5 years' time and you want to be sure about how much
money you'll have.
Here's an example that shows how small differences in returns
over a long time really add up.
|Rate of return for 20 years,
reinvesting all returns
|4% per year
|6% per year
Terry is 18 and has just started working full-time for the local
council after leaving school. Terry chose the 'capital stable'
investment option for his super because he was worried about the
risk that comes with a 'growth' strategy.
In the long term, Terry's super fund expects 6% returns from
capital stable investments and 9% returns from growth
Terry thinks that he may have been too cautious in choosing a
capital stable strategy. So he used MoneySmart's Super
calculator to see what that 3% difference (from 6% to 9%) will
mean over the course of his working life.
You can see Terry's calculations in the table. What would you
What Terry gets with a capital stable strategy
(6% return each year)
What Terry gets with a growth strategy
(9% return each year)
Difference in Terry's super
when he retires
After 47 years
Diversification means spreading your investments so you don't
have all your eggs in the one basket. The aim of diversification is
to reduce the risk of losing money, so that if one investment
produces poor results or is completely wiped out, you still have
other investments that may offset the loss or at least save you
from losing everything. Super funds diversify by spreading the
pooled funds they manage across and between different types of
Can you change your investment strategy?
Most funds let you change your investment strategy. Some funds
recommend choosing a higher growth strategy when you are younger.
You might feel more comfortable taking higher risks for higher
returns while you have time on your side to recover from occasional
As you get closer to retirement, consider making extra
contributions to super to boost your balance. You might decide to
change to an investment strategy with less risk. At this time in
your life, you might feel more comfortable knowing you are less
likely to lose any of your super money before you retire. It all
depends on your personal circumstances and how much risk you are
personally comfortable with. Consider getting personal financial
advice from a licensed financial planner about the best option
- Most super funds let you choose between different investment
- Depending on the strategy, your super will be put into certain
types of investments.
- Different strategies involve different levels of risk and
- The strategy you choose affects how your super grows.
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Last updated: 03 Dec 2014