What exposure to growth investments should I be looking to have?
What exposure to growth investments should I be looking to have?

Expert advice: Learn to make better investment decisions

THE question has been posed to me by a 64-year-old who plans to retire later this year; what exposure to growth investments should I be looking to have for my superannuation and allocated pension investments for the long term in retirement.

It is generally accepted that growth assets will outperform defensive assets such as cash and fixed interest in the long term. As such, it is important that your overall portfolio has exposure to growth assets to protect against the long-term impact of inflation.

There is no definitive answer as to how much you should invest in growth assets in retirement. How much you choose should be determined by your appetite for risk, your life expectancy, your income needs and your ability to weather a market downturn and allow for recovery.

Diversify your portfolio among a range of investments, both growth - such as shares, property and infrastructure - as well as defensive - such as cash and fixed interest. These asset classes should be diversified by type and a mix of Australian and international.

Retirees typically feel comfortable with exposure between 50 and 60 per cent of their assets to growth investments.

There is logic to this asset allocation; assuming you draw income from your allocated pension at 5 per cent per annum and you withdrew the money from the defensive assets within your portfolio, on a 50 per cent growth exposure, you have 10 years "breathing space" before being forced to sell growth assets in the event of a share market crash.

If your portfolio was structured as 80 per cent growth, then obviously you would only have four years.

You need to determine how comfortable you would feel in this scenario and how big an income buffer you would require.

Understanding the difference in the performance of superannuation funds

While the fees charged by superannuation funds are an important consideration, the primary driver of investment performance is asset allocation and investment selection.

Asset allocation refers to how the funds are invested. Typically, superannuation fund managers will invest in a range of assets such as shares, property, infrastructure, fixed interest and cash.

Quality investment selection is reflected in the skill of the manager to buy assets that grow in value and generate a rate of return in excess of the market.

Trying to compare funds on a like-for-like basis is not as easy as it should be. You need to ensure that you are comparing funds with a similar asset allocation. This is not made easy by performance tables that bundle funds together as "diversified" or "balanced" funds when there is a marked difference in their asset allocation.

If one balanced fund has 60 per cent exposure to growth assets and another one has an 85 per cent exposure to growth assets, it should be fairly obvious which one will outperform if share markets are performing strongly. But, if the opposite occurs then an inevitable outcome will ensue.

Know where your money is going

My concern for superannuation fund investors is that they know where their funds are invested and what risks they are taking to generate a rate of return. Past investment performance is important, but so is the amount of volatility you experience and also the capital risks you take on board to generate a return.

Make sure you check a funds exposure to growth assets and compare between funds with a similar exposure. Don't rely on the fund name or its ranking to give you the answer.

Reading through the websites of some particularly high-profile super funds worries me incredibly. I hope those investors investing in some balanced funds know that in some instances that they may be exposed to 85 per cent exposure to growth assets and they accept that level of risk. There is nothing wrong with this asset allocation provided you understand the risks you face in the pursuit of return.

Once you are comparing on a like for like basis, then compare the relative performance, considering fees, the volatility and the capital risks taken to generate the returns. Don't rely on the super fund or performance tables to do this for you.

Q&A with The Coach first appeared on www.wealthpartners.net.au. Any general advice in this story doesn't take account of personal objectives, financial situation and needs.

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