Your super is probably one of your biggest investments. It can take you decades to save for your retirement, so it’s wise to take a long-term view when investing your hard-earned savings.
Time in the market, not timing the market
Some members try to time markets by predicting whether they’ll go up or down, and then change their investment options at short notice to take advantage of these movements. This can be a risky investment strategy that may not deliver you favourable returns over the long term.
Investment markets are influenced by a range of factors, such as interest rates, inflation, exchange rates and the economic outlook. So, accurately predicting short-term market movements is difficult.
Members who change their investments in response to market movements are often responding after the event. They switch out of one investment option when its value is already declining and then switch into better performing investments when their values are already reaching a peak – effectively selling low and buying high.
Understand the importance of time
Time plays an important role when it comes to investing.
As a general rule, it’s your time in the market, not your timing of the market that tends to give you the greatest opportunity to maximise your potential to achieve superior long-term returns.
The daily fluctuations in the value of a typical shareholding, for example, are greatly diminished over time frames of five to seven years or more. In general, the higher the level of risk associated with the investment option you choose, the longer you’ll need to keep that investment to reduce the impact of that volatility and increase your chance of benefiting from the investment’s potential to earn higher returns.
Think about how long you have to save
Choosing the right options depends on several things, but one of the biggest is how long you have to save before you need to access your super.
Because time plays an important role when it comes to investing, if you’re just starting out and have more time to invest, for example, 20 years or more, you’re more likely to tolerate the short-term ups and downs associated with higher risk assets, such as shares, to enjoy their potential to provide higher long-term returns.
On the other hand, if you’re closer to leaving the workforce permanently or wanting to reduce your hours and have, say, less than 10 years to invest, or if you depend on your super to provide you a retirement income, you’re probably less likely to recover from your investments going up and down in value. You might, then, prefer to invest in defensive assets, such as cash and fixed interest.
Set an investment strategy
A prudent approach to investing can be to set an investment strategy according to the time you intend to be invested and sticking to that strategy. Of course, if your circumstances change you’ll need to rethink your strategy.
Super is typically an investment you’ll hold for decades rather than short periods of time, so you’ll stand a better chance of making the most of your super investments if you can withstand short-term market fluctuations and maintain a long-term focus.
If you want help choosing investment options or creating an investment strategy that suits your needs and goals, talk to a UniSuper financial adviser today on 1800 UADVICE (1800 823 842). But, if you don’t want to choose an option and are happy for us to do this for you, we’ll automatically invest your super in our default option, Balanced.
Boost your super with compounding
Your super is made up of money invested over your working lifetime that will need to sustain you for decades in your retirement. Fortunately, the longer you invest your super, the more time you’ve got to take advantage of compounding.
Compounding is investment returns earned on your investment returns.
It happens when you reinvest your positive investment returns (reinvestment happens automatically with super) instead of withdrawing and spending them (which you can generally do with other, non-super investments). Your savings accumulate faster, all the while increasing your potential to earn more returns on your growing savings pool.
So, the younger you are when you start saving for your retirement, the more time you’ll have to benefit from compounding before you retire. The graph below shows compounding in action.
Anecdote – Time can mean more money
Meet Sue and Ewan. Both UniSuper members. Both 60 years old. Both have been regularly topping up their super with extra contributions.
Sue has been investing $2,000 each year (less than $40 a week). Ewan $5,000 each year.
Even though Sue has invested less money in total than Ewan, she is more than $125,000 richer.
Why?
Sue had more time.
Sue's 15-year head start means that her money has had more time to benefit from compound interest.
| |
Sue |
Ewan |
| Starts investing at age |
25 |
40 |
| Invests until age |
60 |
60 |
| Investment timeframe |
35 years |
20 years |
| Investment per year |
$2,000 p.a. |
$5,000 p.a. |
| Total amount invested |
$72,000 |
$105,000 |
| Investment value at age 60 |
$372,204 |
$247,115 |
Data assumes an Investment return of 8% p.a. No allowance has been made for taxation or investment fees and charges. Lower investment returns and/or periods of market volatility, and the factoring in of taxation or investment fees and charges would affect the analysis and could change the comparison.
This example is for illustrative purposes only and does not relate to any of UniSuper’s investment options.
Figures are in today’s dollars and have not been adjusted to reflect the likely impact of future inflation.
Understand the impact of inflation
The Consumer Price Index (CPI) measures the cost of living in Australia and inflation is a term used to describe a rise in the cost of living.
Over the time your super is invested, the cost of living will generally rise. While $1 might have bought you a litre of milk 15 years ago, due to inflation, you’ll need more than $3 to buy exactly the same thing today.
Investment return – CPI = real return
Given you want your investments to grow in value over time, it’s important to ensure the growth rate outpaces growth in CPI, otherwise, while the dollar amount of your balance may increase over the years, the actual buying power of your investment may not.
So, when we talk about the ‘real return’ from an investment, we’re talking about the return over and above inflation. As a minimum, you want your returns to keep pace with inflation, but ideally, to make real gains from your investment, the returns need to outpace inflation.
Each of our investment options aims to outperform CPI by a specified percentage (at least) each year, except for the Australian Equity Income option which targets a different type of objective.
Get advice
Talk to UniSuper Advice on 1800 UADVICE (1800 823 842) to find out how they can help you.