Wednesday, 2 September 2015

You often hear people say ‘don’t put all your eggs in one basket’.  What they mean of course is don’t count on any one thing to keep what is valuable, safe. The same is true for investing. And we’ve spoken before about diversification and how it typically means spreading your investments across different asset classes. 

Asset classes can perform differently under different market conditions and some asset classes tend to move counter to each other, meaning when one asset class performs poorly, another might perform well. Of course the aim of diversification is to reduce the likelihood of any single asset class having a major impact on your investments.

Diversification is important to consider when investing your super and is a key strategy we employ in managing our Ready Made1 (Balanced, Moderate, Aggressive) and Lifetime options. But if you happen to invest in multiple investment options as a means to diversify your investment risk, either through one super fund or through multiple investment managers, super funds or platforms, it can be a challenge to keep track of your total portfolio i.e. what you’re actually invested in and to understand what your underlying risk profile really is.

To make sure your super investments are configured to assist in meeting your financial goals the first thing I’d suggest is to make sure you know exactly what you’re invested in and what this means in terms of the level of risk your total portfolio is exposed to.

Here’s an example to show what I mean, Sally2 has $300,000 in her super account and has this invested through three super funds:

  • $100,000 in the QSuper Balanced option– Risk rating 3: Medium;
    Medium risk
  • $150,000 in an equities product with super fund ‘A’ – Risk rating: very high; and
    Very high risk
  • $50,000 in a Cash product with super fund ‘B’ – Risk Rating: very low
    Very low risk

Sally’s overall exposure across the three funds would indicatively look as follows:

Graph


In this case study, Sally believes that overall, she has achieved a balanced fund or medium risk exposure by her selections. What Sally actually has, is an exposure much more similar to an aggressive fund or high risk exposure with an indicative Risk rating that is high.

High risk

What Sally thinks she owns (and the associated risk profile she believes she has achieved) and what Sally actually owns, are quite different. You should be aware of this if you invest across multiple investment options, super funds and platforms.  Always make sure your underlying risk profile is actually what you think it is. You can view the asset allocations and risk ratings of QSuper’s investment options on our website.

It’s up to you to keep track of your overall positions in relation to your financial goals and as I set out above, this can be challenging. This may present a good opportunity to seek personal advice to review your investment strategy.

You’d be aware too that paying multiple fees through investing in multiple products can also have an impact on your overall super balance. You may be inadvertently paying for things like insurance twice, or even paying higher fees than you need to because of multiple investments and things like flat administration fees (that may not be tied to the size of your super balance).

As a final note, it is possible to achieve adequate diversification, depending on your investment needs by investing in any one diversified, multi-asset class investment option. As an added benefit, as well as making it simpler to keep track of what you’re invested in and knowing what you really own, it may even save you from paying more in fees than you need to.

1. This doesn’t apply to the QSuper Socially Responsible option which is wholly managed by AMP Capital Investors Limited through its Responsible Investment Leaders Balanced Fund.
2. Sally is not a real person and the example is provided for illustrative purposes only.
3. The risk rating used is the standard risk measure (SRM), which helps you compare investment options within and across funds. For each investment option, the SRM forecasts the expected number of negative annual returns over any 20-year period. But keep in mind that it can’t give a full understanding of all forms of investment risk. For example, it doesn't show the potential size of a negative return, or when a positive return may be less than you need for your investment objectives. It also doesn’t take into account the impact of administration fees and tax. More information on SRMs, including the methodology we use to calculate the SRM for each option, can be found at qsuper.qld.gov.au/srm
4. This is the asset allocation of the QSuper Balanced option at 30 June 2015

The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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