This video examines diversification in Superannuation. We look at what needs to be considered depending on one’s stage of life and appetite for risk.

 

Diversification is a critical part of superannuation, all along life’s journey.

When you're younger and working, the focus of super is on generating wealth, so the ‘growth’ assets are expected to do most of the work. Growth assets can be more volatile and “risky,” so diversification is critical.

As you get closer to retirement, the emphasis moves to the ‘defensive,’ safer assets, to protect the wealth you've built. While volatility and risk may be lower the time you have available to allow assets to recover from an unexpected fall is much shorter. Once again, diversification is critical.

As you move into retirement, the focus shifts to maintaining wealth and generating income from your capital; but because you may also be drawing down on funds, capital losses such as those experienced in the recent GFC can be devastating.

Also, because people are living longer, their capital must last them longer. Therefore, you'll still need some investments in shares, property and international shares even in retirement, to replenish your funds. Because shares and property can be more volatile, diversification and suitable mix of growth and defensive assets remains a priority.

The type of super fund you choose may impact the type of investment strategies and options to which you'll have access. Some funds have higher exposures to different kinds of assets: for example, industry funds usually hold more in direct investments such as property and ‘alternative assets’ such as infrastructure, than retail funds which tend to hold more in shares and fixed interest.

If you want, you can be a self-directed super investor, choosing from a menu of investments including managed funds and direct investments on a ‘wrap’ platform, taking as little or as much professional advice as you like. Or you can choose to run your own self-managed super fund, which can give you total control, a wider range of investment choices including direct property but at the cost of a heavier compliance burden – and personal responsibility.

Whatever you choose, it’s wise to see a financial adviser to help you set-up and monitor your investment strategy. Again, having a good idea of your appetite for, and tolerance of, risk is an important starting point.

Diversification is not simple, so we recommend you seek financial advice before making any decisions about your investments, to ensure your choices are appropriate to your personal objectives, financial situation and needs.