Your super is one of the key ways you can create a retirement full of good stuff. So how do you choose an investment option that will help you to retire comfortably?
Let’s take a look at some of the factors that might influence the type of investment you choose, from your risk appetite to your age and even the causes you care about.
What to consider when choosing an investment option
The way your super is invested can make a big difference to your nest egg by the time you’re ready to retire. It’s why you’ll hear financial advisers say the earlier you start to think about funding your retirement, the better.
The role of super investments is to grow your money by compounding the contributions and interest these contributions earn over time. There are a variety of different investment options, but it’s important to carefully consider a number of factors when deciding which one’s right for you. These include:
- your needs and objectives
- your appetite for risk
- your age
- your investment time frame
- other investments you might have
- your values.
It’s important to note that unless you specify which investment option you want, contributions to your super are automatically invested in what’s known as the MySuper option. At Hostplus, this is our award-winning Balanced option, which offers a diversified investment portfolio.
Know your appetite for risk
Every investment option has its own level of risk and expected return. In general, a higher investment risk means a greater potential to achieve higher returns over the long term – but also a greater possibility of fluctuating or negative returns in the short term.
Your investment returns play a big part in your ability to reach your financial objectives for retirement. It’s why it’s important to understand your risk appetite – that is, how much risk you’re willing to tolerate – before you select an investment option.
Not sure where to start? Our financial advisers can help. They’ll help you identify the level of risk you feel comfortable with, and make recommendations on which investment products might best suit you.
Your age and investment time frame work hand in hand with your risk appetite when it comes to choosing an investment option.
Consider your age and investment time frame
If you’ve just started working and have decades stretching out before you retire, you may be comfortable with the risk of short-term fluctuations because you know there’s a good chance of achieving a higher return over the long term.
But as you get closer to retirement, you may choose to switch to a lower-risk investment option that preserves your capital and produces lower, but more stable, returns.
Identify your values
Understanding what matters to you can also help guide your investment decisions.
Increasingly, many people want to ensure that their super investment aligns with their personal values. It’s prompted the rise of ethical options – such as Hostplus’ Socially Responsible Investment (SRI) option – that focus on investing in companies and assets that contribute to sustainable outcomes, and seek to reduce exposure to industries like fossil fuels, tobacco, or those where human rights are violated. While it’s a personal decision, an ethical investment option is something that some members seek.
Understanding the different investment types
In addition to considering factors such as your age and your attitude to risk, it’s worth understanding the different types of investments and how they might suit your needs.
Your super can be invested in a variety of assets, including cash, fixed interest, property, infrastructure and equity. Each type, or ‘class’, of asset has its own level of risk and targeted return, and may be categorised as ‘growth’ or ‘defensive’. Cash and fixed interest are generally low risk and low return (defensive), while company shares are high risk and high return (growth). With this knowledge, you can start to match your risk appetite and time frame to the assets that might be suitable.
In turn, different investment options invest in different types and proportions of assets:
- Pre-mixed options. Pre-mixed, or diversified, investment options contain a mix of asset classes. Balanced options, for example, have between 60-80% allocated to growth assets, while High Growth options typically have an even higher allocation of shares. Pre-mixed options are valuable if you know the overarching approach you’d like to take with your investment, but you’re not sure how to divide it between asset classes.
- Sector options. Sector investment options allow you focus your investment on the asset classes that interest you – shares, for example, or cash. If you know which assets suit your needs and how you’d like to divide up your investment, these are the options for you.
Watch our video to learn how choosing the right investment option can put you on the path to a positive financial future.
The information in this article is correct as at time of publication.