And why does it matter?
The term asset allocation comes up a lot in discussions about retirement income and superannuation. It’s hard to avoid and also probably too easy to gloss over, assuming we fully understand both the definition of asset allocation and its importance.
But this could be an error.
Most financial research reveals that an optimal asset allocation can deliver significantly better income results. Recent research on New Zealand retirement savings also showed that overly conservative allocations actually have a negative effect on lifelong income. So there’s a lot at stake here.
Let’s have a look at what some of the jargon associated with decisions on allocation means.
Asset allocation refers to the way in which your assets (or the things you own) are divided across different types of investments – e.g. your home, your cash savings, share and investment properties.
If you consider your total assets as 100%, and it’s all in a term deposit account, then you have a 100% allocation to cash.
Asset Class refers to the type of investment – this includes broad categories such as cash, property, bonds, gold, shares etc. If you have 30% in cash, 40% in property and 30% in shares, then this is allocated over three different asset classes.
An asset manager is the person or entity that manages a pool of investments on behalf of one or millions of customers. Some asset managers such as Vanguard and Black Rock invest trillions of dollars on behalf of their customers.
What does this mean?
This refers to choices you are invited to make when you have savings in a super fund. You are typically asked about your risk profile – you may even fill in a risk profile questionnaire – and then you will be asked to choose from different options that could include:
- Conservative (may also be called defensive)
- Balanced
- Growth
- High growth (aggressive)
- and sometimes, ethical or sustainable
By selecting one of these options, you are creating settings for your savings to be allocated across different asset classes on your behalf, with conservative portfolios typically holding more cash, and aggressive typically investing in stocks in emerging sectors. This is an over simplification but one that will hopefully help you think more about your own risk type and financial comfort zones.
You might also have the ability to invest in single asset classes such as Australian shares, international shares or property.
Here’s some questions we are frequently asked about asset allocation:
Q. I understand what asset allocation is, but what difference does it make if I have less than average super savings?
A. The selection of portfolio type needs to satisfy two broad aims – which may sometimes feel contradictory. It needs to ensure that your funds are secure enough for you not to worry that they will take a slide in value every time the stock market loses a point or two. But if too conservative a setting is in place, it may be that your funds are not growing at a reasonable pace, one that outstrips inflation.
Q. Is growth the most important thing when it comes to asset allocation?
A. No, regardless of whether this allocation is within your super fund, or under your own direct control, there are other considerations that matter. As mentioned above, your own financial peace of mind is very important. But if you have reached preservation age and are now drawing an income stream from your super, then ease of regular payments is a factor. You may also have strong ethical or environmental concerns; in which case you could prefer to be invested in companies with a strong Environmental, Social and Governance (ESG) ranking.
Q. Is there an optimal asset allocation for age 60, or 65?
A. This is a very common question, often typed into Google, as if Google has the answers. It doesn’t. There really is no optimal asset allocation attached to any age. Typically younger people are encouraged to choose high growth settings and older people to choose balanced or conservative. But as longevity kicks in, those conservative settings for 60-year-olds are starting to look somewhat ineffectual when funding another 30 or so years of retirement.
Understanding all the different asset classes and the options available to you to choose different growth settings is very powerful. The next step is to have a very clear understanding of your own risk tolerance so that you can adjust your asset allocations and choose the right settings when it comes to growth.
If you would like to step through a Retirement Essentials Risk Tolerance Questionnaire with one of our qualified advisers, why not book a consultation and learn what you need to know in order to review your own asset allocation?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
I am 69 and currently drawing an income stream from my superannuation. What would be considered the breakup of assets within Conservative, Balanced and Growth options. My current spread is as follows:
Cash – 29%, Fixed Int – 18%, Aus Shares 11%, Int Shares 12%, Property 30%. Would this be considered conservative.
Thank You
Hi Gary. Thanks for the question. The labels Conservative, Balanced and Growth are used by many super funds to describe their investment options but they don’t always use a consistent approach to asset allocation. This can be very confusing for people as the same asset allocation could be described as Balanced by one fund and Growth by another. I’ve listed below the asset allocations HESTA, one of Australia’s largest funds, uses as a guide.
HESTA High Growth: 89% Growth Assets and 11% Defensive assets
HESTA Balanced Growth: 70% Growth assets and 30% Defensive assets
HESTA Conservative: 36% Growth Assets and 64% Defensive assets
Typically cash and fixed interest are defensive assets and Australian shares, International shares and private equity are growth assets. Some funds consider Property and Infrastructure to be defensive assets while others put them in the growth category. Listed property and direct property can also be treated differently. There are lots of permutations to this which makes it hard for most of us to get our heads around it. The asset allocation you have would tend to be described as quite conservative however that can depend a little on the make-up of the property component.
One of our Advisers could help you get a better understanding of this in a risk tolerance consultation if you would like to book a consultation.