Superannuation Investment Options & Mix: How To Best Invest Your Super

Investment options within super are wide and varied, depending on what is offered by your superannuation fund.

There are literally thousands of superannuation investment options available for you to choose.

So many options can be overwhelming, but are we complicating a rather simple process?

Superannuation Investment Options

The investment options available within super range from managed funds, to listed equities, to term deposits, bank accounts, SMAs, ETFs, MDAs, IMAs, listed property, unlisted property, direct property, unit trusts, private equity and everything in between.

Hell, you can use your super to buy a Pro Hart, a Penfolds Grange or a ‘74 Monaro (as long as you don’t hang it, drink it or drive it).

But let’s not get carried away. You can see how it’s easy to over-complicate a simple process!

For the most part, your super investment options will be limited to diversified pre-mix options, managed funds, term deposits, cash accounts and ASX-listed shares.

The range of investment options you will have available to you is simply based on what your super fund offers on their investment menu.

Industry Super Fund Investment Options

Traditionally, Industry Funds were low-cost super funds with investment choices limited to a handful of pre-mix options.

For example, a typical investment menu for an Industry Fund might have included the Defensive option, Moderate option, Balanced option, Growth option and High Growth option. However, many Industry Fund’s have expanded their investment offerings to include a range of other investments, with some allowing invested in ASX-listed shares.

Retail Super Fund Investment Options

Retail Super Funds have generally provided a wider range of investment options compared to Industry Funds, including access to hundreds of managed funds and ASX-listed shares.

In the past, Retail Super Fund fees were typically more expensive than Industry Funds, which was largely justified by the investment options available. However, since the evolution of Industry Funds to provide more choice to their members, many Retail Super Funds have adjusted to offer both basic and full access super funds to better compete with Industry Funds on price, which they have done successfully.

SMSF Investment Options

The investment options available to SMSF members is only limited by superannuation legislation and the SMSF’s Investment Strategy and the SMSF’s Trust Deed.

While SMSFs are usually more expensive than Industry and Retail Super Funds, in terms of cost, time and responsibility; a major appeal is that members can invest in things like residential and commercial property, direct equities on international exchanges and term deposits from any provider.

Best Superannuation Investment Options

The best superannuation investment option is the option that has a high likelihood of producing returns in line with your expectations at a level of risk you are comfortable with.

But what does that actually mean? Well, the purpose of superannuation is to invest tax-effectively for your eventual retirement. Now, hopefully, you have a fair idea of, when you would like to retire, the income you would like to have in retirement and the investment return you need between now and then to achieve your retirement objectives. Using this information, you should be able to decide on the best super investment option for you, provided you are comfortable with the risk associated.

The best super investment option will be different for everyone, depending on what you are trying to achieve and your appetite for risk.

For many people, a well-diversified pre-mix option is all you need. It’s simple and effective. Try not to get too caught up in the best performing super investment options because, often, the best performing this year is not so good next year and vice-versa.

The best super investment mix will usually have exposure to Australian shares, international shares, property, fixed interest, cash and possibly alternative assets such as infrastructure, commodities and private equity.

A more aggressive portfolio will have a higher allocation to growth assets such as shares and property, while a more conservative portfolio will have a higher allocation to defensive assets such as cash and fixed interest.

An investment option with more growth assets is expected to produce higher long-term returns, but is also likely to incur higher volatility and variance in returns. Whereas an investment option with more in defensive assets will usually result in lower long-term returns, but will experience lower risk and capital fluctuations – therefore providing higher certainty of returns and more predictable future balances.

Learn more: Best Super Investment Strategy

Best Super Investment Mix

Having a mix of investments across a range of asset classes, sectors, regions and industries can significantly reduce risk. This is known as investment diversification and is probably the number one rule to investing.

In broad terms, you can invest your super in a conservative, moderate, balanced, growth or high-growth investment option. These profiles represent the ratio of defensive vs growth assets that make up the portfolio.

Here’s a basic example of the pre-mix options you might have available to you within your super fund:

The Moderate and Growth options offered by the same super provider will likely have the same underlying investments, just the allocation to each investment will differ, so that the Moderate portfolio is invested more conservatively and the Growth more aggressively.

You should be aware that a Balanced option from one super fund could have completely different risk levels to a Balanced option from another fund, so always check the fact sheets available, which should outline the growth/defensive allocations.

The best super investment mix for you is simply determined by your comfort with risk and the return you require to meet your retirement objectives.

How to Invest Your Super

It can be very easy to become confused about how to invest your super, but allow me to try and simplify it for you.

Think about it this way: Each investment market or asset class has a benchmark or an index. The index represents how that particular market is performing. For instance, the ASX 200 is an index for the Australian share market and illustrates how the top 200 companies weighted by market capitalisation perform each day. The S&P 500 does the same for the US market.

Index Funds and Index ETFs

Now, there are investments you can invest in that replicate these indexes, so that your money returns exactly what that index returns by owning the same shares in the index, with the same exposure to each company as the index has – reweighted every day as the index changes.

Some super funds have index fund or ETF options, whereby you can invest in, for example, the Australian Shares Index or pre-mix options such as the Balanced Index Fund, which is a combination of a range of index funds such as Australian Shares, International Shares, Fixed Interest, Property and so on.

Index investments are low-cost, because the investment decisions made by the fund manager are all automated based on algorithms replicating the relevant index. There is no ‘skill-set’ of an investment manager trying to increase returns by buying undervalued investments and selling overvalued investments.

Active Managed Funds and Managed Accounts

Actively managed investments are pools of money managed by professional fund managers. Generally, the objective of an actively managed fund is to produce higher returns than the relevant index. For example, an Australian shares fund manager is judged on their ability to produce higher returns than the ASX 200 index.

Because active funds management requires a specialist skill-set and is intended to produce higher returns, these types of investments charge higher fees. The intention is that the additional fee (compared to index funds) will be more than covered in additional returns, yet in many cases this does not occur.

If the investment option you are choosing does not have the word ‘index’ in the title, then you can usually assume it is an actively managed investment.

Self Investment

You may choose to completely manage your own investments without employing the services of an investment manager. If you own a SMSF, you might invest in direct real property, or ASX-listed shares. Many Industry and Retail Super Funds also provide share trading facilities and you might use this to manage your own share portfolio.

Read more: Can I invest My Super In Shares

Regardless of how you decide to invest your super, remember this: A large number of professional investment managers who spend every day actively trying to ‘beat’ the index will fail over the medium to long term. These are specialists who have intimate knowledge of investment markets and spend countless hours researching and analysing companies, the economy and market trends. So, if these experts struggle to outperform a set-and-forget index fund, what hope do you have?

I’ve seen many people lose large chunks of their super because they got cocky earning a few grand doing a little trading on the side and decided it was time to get their Warren Buffet on and start trading the lifetime worth of savings they had in super. Needless to say, those people will be working well into their 70s.

Look, I’m not saying you aren’t capable of managing your own investments. But more often than not, a low-cost index fund or pre-mixed option offered by your super fund will provide better returns than what a casual amatuer ‘trader’ can achieve… and it’ll save you a lot of your time.

So, no matter how good you think you are investing, no matter how many property investment seminars you’ve been to, no matter how many ‘trading secrets’ you are privy to from folks on YouTube and Facebook, do yourself a favour. Stop. Think. And imagine what it would be like to need to work for an additional 10 years after you had intended, while all your friends are retired, because you thought you were the Wolf of Wall Street.

Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.