Most superannuation funds let their customers elect how their balance is invested, meaning you get to decide what assets you want. Your superannuation is a trust that usually invests in one of two ways: investment strategies or by specified asset allocation.
Asset allocation refers to how money is divided between different types of assets or how much of a person’s portfolio is invested in asset classes. These can include shares, cash, property, fixed interest or international investments. Asset classes have varying levels of risk and potential return. This means that a super fund’s asset allocation directly influences the level of risk and return in a portfolio. By diversifying amongst each of the asset classes, the overall risk of the portfolio can be reduced.
Getting involved in asset allocation can provide the ability to further customise the mix of assets that your super fund is invested in and the proportions of your balance that are invested in each asset. While there is no ‘one size fits all’ approach to smart investing, there are a number of common guidelines that individuals may choose to consider when going forward in an asset allocation strategy.
One of these is related to growth assets. These assets are high-risk and high-reward, such as shares and property. This guideline states that if you subtract your age from 100, that is the percentage of your super portfolio that should be made up of growth shares. It is based on the idea that when you are younger, you will end up with a higher percentage of growth assets with this approach. This is because you can afford to take risks as you have a longer period of time to make up any of your losses, while as you get older you need to adopt a more conservative approach.
It is worth keeping in mind that everyone is different, and consider what type of asset allocation is most appropriate for your situation. Choosing an asset allocation that matches your risk profile, investment timeframes and objectives can be complex, so it may be worth seeking professional financial advice.