What your holiday luggage can teach you about super
Just like you pack for changing conditions when you plan for an overseas trip, you should prepare your superannuation portfolio to suit a variety of environments.
By Daniel Choo - 5 min read
A little about Daniel
Daniel Choo manages the diversified portfolios on behalf of Russell Investments Master Trust members and retail investors. The portfolio management team allocates between different asset classes such as shares, bonds, property and currencies.
Imagine you’re about to embark on a big world trip. First stop, the beaches of Asia, then on to England for your nephew’s wedding. After that you’ll hop to North America, maybe rent a Mustang and get your kicks on Route 66.
While it may not be the first thing on your mind when you’re planning, what you pack in your luggage will have a major effect on how much you enjoy your adventure.
If you pack only parkas, you’ll question your thinking when you land in Bangkok. If you bring only beachwear, you’ll regret it when you land in London on a blustery morning (and your nephew’s bride-to-be may never forgive you).
It’s common sense to pack a range of outfits when you’ll be away for a while and might meet different climatic conditions on your trip.
But have you considered that similar principles apply to your super?
Superannuation is a long-term investment and financial and economic conditions change all the time – a bit like the seasons.
If you stack your portfolio with shares, you may be ill-equipped to deal with downturns in equity markets. If you hold only cash, you might not achieve the returns you need in the long run.
Just like the weather, it’s hard to predict what will happen in financial markets each year, and which asset class will best suit the conditions. Far better to pack for all occasions so you are prepared for all environments you’re likely to encounter.
In investments, this is known as diversification.
All weather options
In a previous article, I discussed the different assets that go into a super fund.
Broadly speaking, there are two categories of investments: growth assets and defensive assets. Growth assets include investments like shares in a company. Think of growth assets like your summery wardrobe pieces: linen pants, sandals, Hawaiian shirts.
Growth assets perform well when markets are running hot. Take 2021, for example: governments slashed interest rates and spent big on projects to help people who were affected by the Covid-19 pandemic. Low interest rates allowed companies and consumers to borrow cheaply, lifting shares and property markets. As you can see in this table, growth assets – international shares and Australian Real Estate Investment Trusts (AREITs) – performed best in this environment.
Click image to enlarge
Relative performance of asset classes over 20 years (2022 edition)
Source: Sources for the asset classes and sample diversified portfolios are as follows: (1) Australian Shares : S&P/ASX 300 Accum Index, ASX All Ordinaries Accum Index prior to 31 March 2000 (2) Australian Bonds: Bloomberg AusBond Composite 0+ Yr Index, 1980-1989 Commonwealth Bank All Series All Maturities. (3) Cash: Bloomberg AusBond Bank Bill Index (Australian 91 Day Treasury Notes prior to 1988). (4) International Shares: MSCI World Index – Net; Russell Developed Large Cap index prior to 1 October 2018; 1980-1996: MSCI World Net Div Reinvested Accumulation Index (in AUD). (5) International Bonds: Barclays Global Aggregate Index $A Hedged. Saloman Smith Barney World Government Bond Index $A Hedged (Note: Pre-1985 returns unavailable, Domestic Bond returns used) (6) A-REITs: S&P/ASX 300 A-REIT Index (ASX Property Trust Accumulation Index prior to 31 March 2000). (7) International Shares Hedged: MSCI World Index – 100% Hedged to AUD - Net; Russell Developed Large Cap index - AUD Hedged prior to 1 October 2018; 1988-1999: MSCI World Net Div Reinvested Accumulation Index $A Hedged, MSCI World Local Currency Index prior to 1988. The multi-asset portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns For more information on the composition of the sample portfolio, please contact Russell Investments on +612 9229 5111. Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (RIM). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. This document is not intended to be a complete statement or summary. This work is copyright 2022. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process, nor may any other exclusive right be exercised, without the permission of Russell Investment Management Ltd.
Contrast that to 2018. That year, investors’ fears of economic slowdowns in the US and in China, as well as nervousness around global events such as Brexit sent share markets crashing. The storm swept through financial markets around the world.
Environments like that are where defensive assets come into play. As the table shows, Australian bonds were the top performing asset class in 2018, while shares were the worst performers. Defensive investments like bonds and cash produce stable returns with lower levels of risk and shield your portfolio when market conditions turn frosty – cue the fleeces and ski gear!
Something else you might notice from the table is that multi-asset portfolios are consistently in the middle ground. This is because these investments include a diversified range of assets – suited to a variety of conditions. Like a well-prepared traveller, these portfolios are packed for all occasions, so they experience smoother results over time and are not left exposed to extremes.
Time on your side
To some degree how much time you have to retirement will determine what type and level of diversification you need.
You may have noticed that people tend to feel the cold more as they age. Similarly, as you get closer to retirement, you will feel the effects of market downturns more acutely than you do when you’re younger. This is because you have less time to make up for any portfolio losses you may incur.
Younger people looking to grow their wealth might choose a fund with a higher proportion of assets like shares which can gain value quickly, and less in defensives. If there is a sudden sharp fall in share markets, they have time to wait for prices to recover, which they usually will, it just may take a few years.
When you are closer to retirement age, you may want to consider a portfolio with less growth assets and more defensive assets like bonds and cash. Your fund will likely grow more slowly but not lose as much value if share markets fall.
One major difference between packing for a holiday and selecting your superannuation portfolio is that you can’t leave superannuation planning to the last minute like you can with your holiday packing.
The earlier you select an investment portfolio that is appropriately diversified to match your plans, the better you will be equipped to enjoy your journey to retirement and beyond.
By selecting a diversified multi-asset portfolio, you will likely see steady results year after year, no matter what happens in individual markets. You might not achieve the biggest returns every year, but you won’t be caught out by market extremes.
Issued by Total Risk Management Pty Ltd ABN 62 008 644 353, AFSL 238790 (TRM) as the trustee of the Russell Investments Master Trust ABN 89 384 753 567. This document provides general information only and has not been prepared having regard to your specific objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. The information has been compiled from sources considered to be reliable, but is not guaranteed. Any examples have been included for illustrative purposes only and should not be relied upon for the purpose of making an investment decision. Past performance is not a reliable indicator of future performance. The Product Disclosure Statement (PDS) can be obtained by phoning 1800 555 667 or by visiting russellinvestments.com.au. Any potential investor should consider the latest PDS in deciding whether to acquire, or to continue to hold, an investment in any Russell Investments product. The Target Market Determinations for the Russell Investments Master Trust are available on our website.
Russell Investment Financial Solutions Pty Ltd ABN 84 010 799 041, AFSL 229850 (RIFS) is the provider of MyTracker and the financial product advice provided via GoalTracker Plus. Russell Investments or its associates, officers or employees may have interests in the financial products referred to in this document by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell Investments or its associates, officers or employees may buy or sell the financial products as principal or agent.
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This work is copyright 2021. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process, nor may any other exclusive right be exercised, without the permission of Russell Investments.