Did I have a minute to talk, a colleague asked, in somewhat hushed tones. He told me he’d been reading a few articles about a coming sharemarket crash and was worried about his superannuation.
In asking the question, my colleague had demonstrated that he’s paying attention to the investments in his super fund. For most of us, super will be our largest or second-largest asset when we retire. It’s clearly very important, yet many people feel disconnected from it.
For some, retirement seems too far away to feel tangible. Others are overwhelmed by all the choices and jargon surrounding super. And we can all think of more fun things to do on a given evening than reassess our super options.
The result is that too many people pay no attention to their super and simply leave their money in their employer’s default investment option. Actually, they leave part of their money in that default fund, part of it in their previous employer’s default fund and so on. The current record holder among those I’ve spoken with had eight super funds.
First thing to avoid
So the first and most important extreme to avoid in our Goldilocks plan is neglect. Fortunately, a simple game plan will do most of the work for those of us more than 10 years away from retirement.
Unlike your physical health, which requires an ongoing focus on diet and exercise, getting your super broadly right is often a one-off decision until you approach retirement. And it’s one that can pay huge dividends over the years – well into six figures by simply filling in a few forms. Now that’s what I call a good return on investment.
Before getting to the game plan, let’s define the other extreme of our Goldilocks analogy. It’s the one I wanted to warn my colleague about: overcomplicating things.
My colleague has a demanding career and a young family. It’s important that he’s aware of his super, to avoid the pitfall of neglect, but he doesn’t have the mental bandwidth or the investment expertise to start trying to time investment moves in his super fund. Apart from adding a layer of complexity to his already demanding life, he would be opening up a can of worms specific to his super investments. Before explaining why, let me offer a quick primer on super investment options.
With a few exceptions, our super is generally invested in one of four asset classes: cash, fixed interest, property or shares. Generally, though, super providers package up these investments under a number of “pre-mixed” options. The options with labels such as “growth” or “aggressive” will have a heavy weighting towards shares and property, with less allocated to cash and fixed interest. In the middle of the scale are the “balanced” or “moderate” options. These are typically spread across all asset classes. The exact proportions will depend on which company you’re dealing with.
Incidentally, those default options I mentioned earlier are usually invested in this type of option and my general view is that they aren’t right for most people. They’re typically too aggressive for those in, or close to, retirement and not aggressive enough for those with a long way to go before retirement.
The final broad type of pre-mixed investment option is “conservative”, “defensive” or “capital stable”. These are heavily skewed towards cash and fixed interest and have little, if any, shares or property. In a sharemarket downturn, you have the best chance of seeing your balance go forward while others are in reverse if you’re invested along these lines. Over the long term, though, cash has been the lowest-returning asset class and I expect that will be the case for its returns over the next 10 to 20 years, too. That presents a problem to anyone more than 10 years away from retirement, which includes my relatively young colleague.
Thinking it through
For the sake of argument, let’s say my colleague were to make some changes to his super investments based on the possibility of a sharemarket crash. Let’s imagine he moved from a growth option to a defensive one. How long would he then wait for a crash? Two years? Three?
If no such thing happened in that time frame, would he stay in the defensive option indefinitely, waiting for a market setback? Or would he assume that the crash predictions were wrong and shift back into shares – quite possibly at a higher price, having missed out on a few years of returns?
You can see how my colleague could get himself into a sticky situation quite quickly by trying to time his investment choices. As the financial joke goes, economists have predicted seven of the last three sharemarket crashes. The irony is that taking a more defensive stance in your super choices can be a risky move in itself because you’re out of the asset classes that are most likely to perform best over the long haul.
One of your key advantages as a long-term investor, as we all are in super, is that you have time on your side and can ride out the inevitable ups and downs. By shifting into lower-performing asset classes, you introduce an element of timing the market.
For most of us, the best thing is to invest our super in a growth-type option and not even think about changing it until we’re 10 years, or less, away from retirement. At that point, if we’re within sight of our desired retirement balance, we can move to a more conservative mix of assets to ensure we don’t jeopardise a comfortable retirement.
In my two-point Goldilocks plan (see panel) following the first step will ensure you avoid the worst pitfall of all, which is neglecting what is likely to become your second-largest asset, if not your largest.
The second step gives you a real shot at accumulating a decent super nest egg by combining what are likely to be the best-performing asset classes with the low taxes paid inside your fund and a hefty number of years to let compound interest work its magic.
Goldilocks wanted porridge that was not too hot and not too cold. And this is the Goldilocks super solution in a nutshell: take enough time and interest to consolidate your super and set it up appropriately but don’t overengineer things and create headaches for yourself.
Follow these rules and you’ll never need to worry about whether a sharemarket correction, or even a crash, is on the horizon. You’ll be off doing something more productive or fun with your time, safe in the knowledge that, despite the odd bad year along the way, your super is invested in a manner that gives you every chance of a comfortable retirement down the track.