If you’ve just started your first job there’s something you need to know about your super that could earn you hundreds of thousands of dollars.
Workers may not realise it, but unless you’ve chosen otherwise, you are now being stapled to your boss’s default super fund under laws passed last year.
In most cases, that means you’ve been put into a balanced fund with an allocation towards growth assets (such as shares and property) of between 60 to 80 per cent.
The problem: That might not be the best option for younger people.
Mano Mohankumar, chief researcher at Chant West, said young workers may benefit more from a more aggressive growth option than the default.
“There is a really long time horizon for someone who is joining the workforce at 21 and they’re going to be working for 40 years in most cases,” he said.
“They can be less concerned about living through periods where there is sharemarket weakness.”
Higher growth super options
The difference between a high-growth and balanced super strategy can be worth hundreds of thousands of dollars by the time you retire.
With that in mind, it’s worth considering whether you could benefit from a more aggressive investment position.
To find out, look at fund performance over time.
For example, high-growth options with between 81 and 95 per cent of funds in growth assets have delivered significantly higher returns over the past 20 years.
The percentage differences in the below table demonstrate this.
In 2021, high-growth funds performed 26.1 per cent better than the balanced option, and over five years the difference was 17.6 per cent.
That means that every year over five years you would have made 17.6 per cent more if you were in the high-growth fund.
That is a huge figure when you consider that “there is a compounding effect at work meaning your money is earning a return on a larger balance each year”, Mr Mohankumar said.
Even over the longer term, the out-performance in high-growth was 6 or 7 per cent, Chant West found.
Figures like that make, “a massive difference over 30 or 40 years of your working career”, said Antoinette Mullins, principal of Steps Financial.
“Just as the level of fees make a big difference over time so does an extra one or two percentage points in your return,” she said.
High returns are abnormal
Beware though: Although those high returns are great, many people have been lulled into thinking they are normal because over the past decade sharemarkets have been so high.
If you go back to 2015, many member accounts were still recovering from the dramatic losses felt during the GFC (global financial crisis).
A look at the table above shows just how dramatic those falls were.
Between October 2007 and February 2009, balanced funds fell 26 per cent and high-growth options lost a dramatic 33 per cent.
“If you have a high-growth portfolio and it does really poorly because there are multiple bad years then you will feel that,” Ms Mullins said.
There are some steps you need to take to determine whether high growth is really the option for you.
“You really need to compare whatever your employer option is with what the market can offer,” Ms Mullins said.
That means doing some research into what other funds are available and what their returns have been.
Finding something that has performed well is not the be all and end all of investment choice, as your decision “has to pass the sleep test,” Ms Mullins said.
You should review what fund you are interested in actually invests in and get a sense of whether you are comfortable with it.
That’s not necessarily a complex process, as funds will have details of their investments on their websites, but it means doing a bit of work and “not settling for an easy option,” Ms Mullins said.
Although the declines of the GFC are frightening, Mr Mohankumar said super funds have learned from that experience and redesigned investments to make them less vulnerable to a sharemarket crash.
“Portfolios are better diversified today than they were going into the GFC, absolutely,” Mr Mohankumar said.
That diversification has come through reducing overall exposure to listed investments like shares, bonds and listed property and infrastructure.
To make up the difference, funds have put more money into unlisted assets and alternatives like hedge funds and private equity.
Although those things aren’t unaffected by market crashes and weak economies, they do give funds exposure to an asset class that is separate from the sharemarket.
This means they are more likely to hold value in a weak market.
The overall sum of the post-GFC super changes is listed above.
The most significant change has been in shares, particularly Australian shares, which now account for 24.7 per cent of a balanced portfolio compared to 32.2 per cent before the GFC.
But investing isn’t a set-and-forget game and you need to review your decisions “every two or three years”, Ms Mullins said.
“Big life events like getting married or having kids can really change your risk profile and the way you view money,” she said.
That means if you have chosen a high-growth option when you are young and single, it won’t necessarily feel right when things change.
“When I had kids it was a completely different phase of life,” Ms Mullins said.
“Suddenly I didn’t want to take on so much risk so I scaled it back.”
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