13
November
2018

Cautiousness with Super

The Risk of Being Too Cautious with Superannuation

When people think about risk in relation to investments, they usually think about their money falling in value, this is only one risk. Another risk is opportunity cost, which is the risk of missing out on potential growth. Given the long-term nature of superannuation, this is an area where opportunity cost can really hurt us.

By far the biggest determinant in your investment performance is your exposure to growth and defensive assets. The more growth assets you invest in (shares and property), the higher the long-term returns. However, this also comes with higher volatility in the value of the investments. Conversely, more exposure to defensive assets will result in both lower volatility and lower returns.

The opportunity cost of being overly cautious with your super when you’re young is huge. If a 30-year-old with a super balance of $50,000, earning $60,000pa, making no additional contributions to super, invests in a conservative portfolio and earns 5% interest each year until age 67, they will finish with just under $1.1mil (assuming their income keeps pace with inflation). If they increase their risk profile and earn 7% (a return in line with expectations for a growth portfolio), that predicted balance is approximately $1.8mil and, if we use a return of 8%, the balance would reach approximately $2.3mil. This is an enormous difference and demonstrates the power of compound interest over the long-term.

It should be noted that none of the investments would provide the same return year-on-year which these calculations are assuming, and the more aggressive portfolios would have a wide array of results along the way. There would be many negative years and potential times for panic. There would also be years with very high returns. The order that these occur affects the end balance and the end projections are estimates.  However, over a long period of time, it is a virtual certainty that the options with higher growth will substantially outperform the more conservative options.

Most people are usually comfortable with the risk associated with property, but many are very sceptical about investing in shares. Investing in these growth options will see you have upwards of two thirds of your money in shares. The thing to remember with shares is that, you are investing in a company or a series of companies. If properly diversified, you are generally invested in the biggest companies in a wide range of industries that is constantly evolving. It is highly likely that over the next 30 years, the evolving biggest companies in Australia are going to make money, and so will our shares.

The power of compound interest magnifies the opportunity cost of being too cautious and not exposing your super to enough growth assets.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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