Seven steps for successful super investing

In times when investment returns are being upended by market volatility, it’s important to keep a clear head and remember some simple rules that can really help you to successfully invest your retirement savings.

This brief guide aims to provide seven simple principles of successful investing for retirement. It will also help put some of the current market volatility into perspective.

1.Start today – the sooner you start the better

Super and pensions are generally considered long-term investments. Indeed, in the majority of cases, it’s likely that you’ll have investments in both kinds of accounts for many decades.

But the appearance of having time on your side shouldn’t undermine the importance of beginning your retirement savings journey as soon as possible.

Although your employer has probably already started investing super on your behalf, making your own additional contributions as early as possible means you’ll be able to take advantage of a very powerful wealth-building tool – compounding.

Compounding is simply the ongoing effect of investment returns earned on your investment returns. It happens when your super’s positive investment returns are reinvested over and over again, over many years. The result is that your savings accumulate at a faster pace, accelerating and continually increasing the amount you will eventually receive when it finally comes time to retire. (Of course, if returns are negative then compounding can have the reverse effect.)

The earlier in life you start, the more time you will have to benefit from compounding before retiring.

Case Study in compounding Sue invested $2,000 a year from the age of 25 until the age of 60, investing $72,000 in total over that time. Tony invested $5,000 a year from the age of 40 until the age of 60, investing $105,000 in total over that time The result? Even though Tony ended up investing more than $30,000 of his own money, Sue’s balance was greater by more than $120,000 when they both reached 60. This is the outcome of compounding.

1This assumes an investment return of 8% p.a. for both scenarios. No allowance has been made for taxation or investment fees and charges.

2. Set goals – what do you want your super to achieve?

Truthfully, the one return that matters for today’s super investors is the one they will receive upon retirement. But, while this might provide some comfort in times of increased market volatility, there are several important things you need to consider.

Whether retirement is just around the corner or the furthest thing you can imagine, planning for it is an activity practically every Australian should undertake. As governments of all persuasions continue to shift the burden of supporting Australians in retirement to individuals, understanding what you want your super to achieve is critical.

Consider questions such as:

• How much money will I need to support my lifestyle for my entire retirement?
• Are my current contributions and investment strategy on track to achieve this?
• How can I better invest my retirement savings for retirement?
• What is my attitude to investment risk and what kind of options am I happy to invest my retirement savings in?

UniSuper recommends that members seek assistance from a licensed financial planner when considering these kinds of questions (see Step 7).

3. Be strategic – align your investment horizon with your risk profile

Having asked the tough retirement questions, it’s time to develop your own super strategy, taking into account your personal goals and attitudes to investment. One of the most critical elements of this will be to continue focusing on your long-term retirement horizon, without getting caught up in day-to-day reports of market ups and downs.

As many of you are now aware, over the last five years the Australian share market has experienced a long period of sustained growth. In these circumstances it’s sometimes easy to forget that markets move in cycles, they go down as well as up.

Importantly, history tells us that short-term ups and downs in investment markets tend to even out over longer time frames.

While past performance can’t be taken as an indication of future performance, the graph below shows the result of investing $10,000 in various market indices from 1 July 1987 to 30 June 2008. Even though asset classes such as property and shares have proven to be more volatile over shorter time frames, over the long term they have provided the highest returns. And, while cash has generally produced lower returns, it has also experienced fewer, and less dramatic ups and downs, meaning that its investors ran less risk of losing money if they were investing for shorter time frames.

4. Embrace diversity – ‘don’t put all your eggs into one basket’

We’ve all heard the phrase, “don’t put all your eggs in one basket”. It also has some truth when it comes to investing your retirement savings.

As the majority of Australian super and pension investors in 2007–08 found out, the risk of negative returns is an unavoidable reality of share markets. The truth is that the risk of loss and the desire for positive returns go hand in hand when it comes to investing your retirement savings.

Fortunately, there are several ways that investment risk can be managed. One of the most widely advocated is to take an approach known as ‘diversification’.

Diversification simply means investing across a mix of assets, rather than investing all of your money in just one type. This can help take the guesswork out of which types of assets you should invest in.

Of course, if you new exactly which assets were going to perform well you’d just invest in these. But predicting the future of markets is rarely an exercise conducted with certainty. Diversification, on the other hand, relies on different types of investments tending to out-perform others at different times. If one of the investments in your investment mix performs poorly, this performance can be offset by the better-performing elements in your investment selection.

All of UniSuper’s Pre-Mixed investment options are already diversified, although to varying degrees. Each employs diversification either through an appropriate mix of investments within a single-asset class, such as in our Cash or High Growth options, or across a range of asset classes, such as our Capital Stable and Balanced options.

5. A little, a lot, whatever you’ve got – invest regularly and don’t try to ‘time’ markets

By investing regular contributions over time you are able to take advantage of dollar-cost averaging. This is an important investment principle that helps remove the guesswork from trying to ‘time’ markets by purchasing when investments are low and selling when they are high.

Over time, dollar-cost averaging can allow you to take advantage of both falling and rising investment markets.

Essentially, by investing regular contributions over time, you can effectively purchase more when investments are priced low and less when markets are priced high. Over time, when done in conjunction with a well-diversified strategy, this can help even out the natural fluctuations of market investments and help reduce your overall risk.

6. Stay on track – monitor investments but don’t be swayed by short-term fluctuations

Regularly monitoring your super and pension investments is the best way to continually keep your focus on your long-term retirement goals. One of the easiest ways you can do this is by registering for UniSuper’s MemberOnline – it only takes seconds.

An important part of this monitoring process will be having the discipline to view short-term periods of negative returns in the context of your long-term goals. Thus, periods of market volatility should not necessarily be cause for alarm. Indeed – depending on the investment option you’ve selected – it’s reasonable to expect them from time to time.

While the temptation to switch to a ‘safer’ investment option, such as Cash, might seem attractive, those investors who chop and change investments in response to market movements can end up taking short-term losses and missing out if the market recovers.

7. Seek advice – call the UniSuper Helpline on 1800 331 685

Before you make any decisions regarding your investments make sure that you are properly informed. This may require seeking out the expertise and experience of an independent financial adviser.

Here’s where UniSuper can help. If you have questions about your super or pension, call the UniSuper Helpline on 1800 331 685. And if you need professional advice, our Education and Advisory Services Team can arrange a personal consultation to discuss your retirement future.

This information is general information only and is not intended to be advice. It has been prepared without taking account of your objectives, financial situation or needs. Before deciding to acquire or hold an interest in any UniSuper product, you should consider whether it is appropriate for you and consider the relevant product disclosure document, which is available from your employer or UniSuper.

Issued by: UniSuper Management Pty Ltd ABN 91 006 961 799 Australian Financial Services Licence No. 235907 Level 37, 385 Bourke Street, Melbourne VIC 3000 UniSuper Helpline: 1800 331 685.