(3) Is superannuation a good investment?

Warning

This webpage covers a very complex topic in a simplified way, which means that it only covers the main points and it does not cover every rule. So be aware that sometimes the simplified explanation on this page will not cover your particular financial situation. Please read our disclaimer before you use any information on this website.

(3) Is superannuation a good investment?

We often get asked questions along the following lines:

  • Is superannuation a good investment?
  • Has Colonial First State super been getting good returns?
  • Is BT super safe?

We do not mind being asked these questions, because our job as advisers is to clearly answer finance questions, on areas such as superannuation and investments.

The problem is that superannuation is not an asset class. When we ask people about their investments, they might say that they have:

  • an investment property,
  • some shares,
  • some money in a term deposit (fixed interest),
  • some money in a savings account (cash), and
  • some super.

However, it is important to understand that super is merely an environment, or structure, in which your money is held. A better way of looking at it would be to look at how the investments are held. Continuing on with the above example, the person's investments are held as follows:

  • Individual Ownership
    The investment property, shares, term deposit (fixed interest) and savings account (cash) are all held in the person's name.
  • Superannuation
     The super is (obviously) held in a superannuation fund.

So now the investments are divided up into individually-owned investments and superannuation investments.

If we looked into this person's superannuation fund, it would not be unusual to find that the superannuation is actually invested 70% into shares and property, with the remaining 30% invested into cash and fixed interest. This is sometimes called a balanced fund or a classic 70/30 fund. So if we look at the big picture, this person's finances are as follows:

  • Individual Ownership
     The investment property, shares, term deposit (fixed interest) and savings account (cash) are all held in the person's name.
  • Superannuation
    The superannuation is invested in shares and property (70%) as well as cash and fixed interest (30%).?

Looking at this person's investments from this perspective, it is clear that superannuation is not an asset class, but simply another way of owning investments. Of course, superannuation has some restrictions on it. For example, you cannot normally access your superannuation until you retire. Nevertheless, it is important to know what you superannuation is invested in.

Those Questions from Earlier

Now that we have provided an explanation on super, we answer the three frequently asked questions from the top of the page.

Is superannuation a good investment?

First of all, your superannuation can be invested in a variety of ways:

  • Your superannuation could be 100% invested in cash, in which case, the return would be quite low (similar to the Reserve Bank's cash rate), but the risk would also be low (it would be almost impossible to get a negative return).
  • Conversely, your superannuation could be 100% invested in shares. In this case, the return could be quite high (e.g. 20% or more in one year), but the risk would also be high (e.g. you could get a negative return of 20% or more in one year).

These days, most superannuation funds provide multiple investment options so you can choose something along the lines of 100% cash, 100% shares, or something in between such as:

  • a conservative fund (30% shares and property, 70% cash and fixed interest);
  • a balanced fund (50% shares and property, 50% cash and fixed interest); or
  • a growth fund (70% shares and property, 30% cash and fixed interst).

Note that there is no universal definition for the various investment strategies (e.g. balanced fund, growth fund). Some superannuation funds may define a balanced fund as 50% shares and property (with the rest in cash and fixed interest) while other superannuation funds may define a balanced fund as 70% shares and property (with the rest in cash and fixed interest). When looking at various investment strategies, focus on the percentage invested in shares and property, not the name given to it.

In fact, superannuation funds have become quite sophisticated. These days, many superannuation funds allow you (and your adviser) to customise the investment portfolio inside your super fund, right down to the number of shares in a company (e.g. 1,000 BHP shares) or the length of a term deposit (e.g. 3 months versus 1 year). The choices available inside full-featured super funds are more than adequate for most people.

Has Colonial First State super been getting good returns?

Note: We have used Colonial First State super in this example simply because Colonial First State is a well-known brand in Australia.

Colonial First State offers many financial products including managed funds (e.g. share funds, bond funds) as well as platform accounts (sometimes known as wraps, master trusts or master funds). By the term platform account, we mean an all-in-one account where you pick and choose investments such as managed funds. For example, you could have a superannuation platform account which is essentially a super fund where you pick and choose the underlying investments (e.g. managed funds).

So, if a person asked us whether "Colonial First State super" is a good investment, we would presume that the person was talking about a Colonial First State superannuation platform account (for example: FirstChoice Super). In this case, you would pick and choose the investments (or your financial adviser would provide recommendations on how to invest your money). Consequently, the return on your super depends on what investments you (or your adviser) choose. Colonial First State is simply providing you with investment choices and following the instructions of you (or your adviser). When it comes to deciding how much to invest in shares and property (as opposed to cash and fixed interest), this comes down to a discussion between you and your adviser.

Is BT super safe?

Note: We have used BT in this example simply because BT is a well-known brand in Australia.

This question is, essentially, the same as the one above (about Colonial First State) but taken from a different angle. By "BT super", we presume that the person is talking about a superannuation platform account (for example: BT SuperWrap).

BT SuperWrap is a large organisation with thousands of superannuation accounts and its staff simply carry out instructions (e.g. forms sent in by mail, or processed by your adviser over the internet). In contrast, you and your adviser will meet face-to-face and because your adviser knows your personal financial circumstances, he or she can provide personal financial advice. If you agree with the recommendations in your financial advice, your adviser will require you to sign some forms and then implement the changes on your behalf (by processing them over the internet using an adviser login, although some forms require a signature and must be posted in).

Because the investment choice is up to you (and your adviser), it all depends on what investments you (and your adviser) choose. A 100% investment in shares would not generally be regarded as safe, because shares can quickly drop in value in a short time period. On the other hand, a 100% investment in cash would generally be regarded as safe because it is almost impossible for this type of investment to lose money.

Sometimes when people talk about safe, they are not talking about whether the investments will lose money but whether their money will go missing (i.e. the chance of your adviser or your super fund committing fraud or embezzlement).

  • The policy of most financial advice companies is that advisers never handle clients' money directly. For example, to invest $50,000 in a particular investment, you write the cheque out to the investment manager-not the adviser. Likewise, if you want to withdraw the money, most investment managers will only pay the funds into your bank account-not the adviser's bank account. Having your money go directly back and forth between your bank account and investment managers makes it virtually impossible for your financial adviser to embezzle your money. Furthermore, financial advisers generally undergo police checks to ensure they do not have a criminal record.
  • In relation to super funds and investment managers, they often use a custodial arrangement whereby the investments are held with a custodian. For example, the investment manager of a share fund will make the decisions about buying and selling shares, but the shares will be held by a custodian. This splitting of the investment manager and custodian roles provides a layer of protection for investors. In fact, superannuation funds and other finance companies often employ numerous measures to minimise the risk of fraud or embezzlement. Generally speaking, the risk of losing your money through fraud or embezzlement is very very low and you are much more likely to lose money through bad investment decisions.