Cash is not king when it comes to super
Record low interest rates are shrinking financial returns for conservative fund members.
Regardless of whether your nest egg is self-managed or in a retail or industry super fund, if it’s mainly been sitting in cash you’ve missed out on healthy returns delivered by diversification.
Five years ago, seven per cent term deposits were offered. But this is no longer the case. Many experts expect slim cash returns for a long time. Recently, deposits pay only two-and-a-half per cent.
The fast-growing self-managed superannuation sector seems to be hit the hardest by the cash crash as members usually make their own investment decisions. Those who don’t use SMSFs should also check that cash does not dominate their savings. Most will already have a diverse range on investments through their fund’s default investment options.
In Australia, we have almost 550 million SMSFs with more than one million members. According to official figures, they hold about 28 per cent of their money in cash. Typical retail and industry super funds hold 14 per cent of their money in cash.
International shares, which is a top-performing asset class over the last five years, represents less than one per cent of SMSF assets compared with 22 per cent for other funds.
Barbara Smith, CEO of Oasis Wealth and author of new book Keep it Super Simple, says that cash returns were nice for those who locked money in term deposits five years ago. But record low interest rates today mean now is not the time to do it again.
“Our experience is sometimes people get scared and just leave it sitting in cash,” she says.
“Now that rates have fallen, people are being a little proactive.”
She says that people need to do their research and “always keep yourself close to your money.”
Online share trading websites such as CommSec have more information than they’ve had before, Smith says.
“The worst thing people do is invest in things they don’t understand. Once they do that you can start to see the money drizzle away. Take it slowly and gradually invest.”
Andrea Slattery, CEO of the SMSE Association, says that the claim that SMSFs invest mainly in cash is incorrect. She says they get a lot of international exposure via investing in Aussie companies with big offshore earnings, like BHP Billiton, Rio Tinto and Westfield.
“SMSFs are more flexible and leading the market in moving into new investments,” she says.
“In the main, people are more engaged, they trust their specialist adviser and are more comfortable with the decisions that have been made.
“You can’t actually do everything yourself – there are a couple of compulsory advisers you need – one’s an auditor and one’s an actuary. You manage it through professional advice directly to you,” Slattery says.
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