4 things you need to know when choosing your investment

One of the most important things you can do for your super is review your investment option. This isn’t as tricky as it sounds. You just need to think about your investment timeframe, your goals, and how you feel about risk. And then look at your options and consider obtaining financial advice.

1 Your investment timeframe – the long and the short of it How you invest for the long term is usually very different to how you would invest money that you could need next year.

Short-term investors usually favour lower-risk investments because they can’t afford to lose their capital.

Long-term investors are often better placed to chase higher returns because they usually have enough time to ride out market cycles.

Two factors will greatly influence your investment timeframe:

  • How long before you plan to withdraw your super?
  • How long does your money need to last?

Remember, your money might need to last you 20 years after you retire. That’s a pretty long investment timeline even if you are drawing income.

2 Your saving goals – how much is enough?
Ever wondered how much you might need in retirement, then decided it was all too hard? Don’t worry, you’re not alone. But it’s not that hard.

First you need to estimate out what sort of income you will need. There are a few ways to do this:

  • Take the general rule of thumb that you’ll need around 65% of your pre-retirement income.
  • Calculate your household budget and work out what costs will change when you stop work.
  • Estimates by ASFA (a superannuation industry body) suggest a couple will need around $50,000 p.a. for a comfortable retirement ($37,000 p.a. for singles).

Now multiply the annual income you want by 14.

This will give you a rough idea of how much you will need for 20 years if you retire at age 65.

For example, if you wanted a retirement of income of $38,000 per annum until age 85 you would need $532,000 in today’s dollars.

Don’t forget, the earlier you retire and the longer you live the more super you will need.

Also, the more extravagant your lifestyle, the higher the cost. ASFA defines a comfortable lifestyle as one where you can afford to go out for dinner, have up-to-date whitegoods and private health insurance, and enjoy regular travel.

3 How do you feel about risk?
How comfortable you feel about risk is known as your risk profile.

Generally, the higher the level of risk you are prepared to accept, the higher the potential gain or loss.

For example, shares are one of the riskier asset classes. Their value can rise and fall significantly over the short term. But they have delivered the best average returns over the long term.

Conversely, cash is one of the least risky asset classes. You have little chance of losing your capital, but the returns are likely to be the lowest on average over the long term.

Consider how comfortable you are with the possibility of losing money, or that the returns on your investments could fluctuate wildly from year to year.

Are you super-cautious, mega-aggressive, or somewhere in between?

Generally speaking, cautious investors don’t like negative returns. They usually focus on short-term performance and pursue lower-return options with lots of defensive assets, like cash-related investments.

Moderate investors tend to take a more balanced approach. They have a medium-term outlook of around five years and accept some risk. But they don’t usually have the time or inclination to weather market cycles. Moderate investors generally choose a balanced mix of assets.

Aggressive investors are hungry for higher returns. They seek above-average performance and will usually accept above-average risk. Aggressive investors tend to take a long-term view and mainly invest in growth assets such as shares.

4 Your investment options
If you haven’t made an investment choice you’ll be invested in the Moderate option. This option is designed to suit most members; however, it may not meet your needs.

Our full range of investment options are described within this section of our website. Take a look and check if your current choice still matches your needs. If you’re unsure, use our online risk calculator at www.legalsuper.com.au/riskprofile. The calculator will suggest which investment option might be best for you.