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| Article Date: February 24, 2006
Just being a rural and regional Australian can involve high financial risks. You can lose your income if it rains, if it doesn’t rain, if government policy changes, if markets shift or for any number of reasons beyond your control. So how much risk do you want to take with your retirement nest egg? Everyone wants high investment returns, but they come with a cost. One of the few things we can be sure about when investing is that there is a relationship between investment return and investment risk. In general, the higher the expected investment return, the higher the risk of investment loss. Even low risk investments carry some risk; remember the collapse of Pyramid Building Society? Pyramid proved that trying to earn the highest returns from any investment, even fixed interest deposits, can lead to loss. But we shouldn’t forget that some people did do well out of Pyramid, mostly those who managed to withdraw their money before it collapsed; and that tells us something about investment risk. Timing is critical. Investing in a high risk high reward way requires excellent timing, unless you’re willing to take the losses when they come. Knowing that higher returns and higher risk tend to go hand-in-hand is useful because it lets people judge the amount of risk that suits them. In superannuation, investment risks are often given names such as cash plus (expect low risk and low return), capital stable (expect a bit more of each), balanced (expect more) and managed (expect high risk and high reward). But investment risks and rewards can also vary a lot within these categories. As a rule of thumb, an investment option with between 60% and 76% of money in growth investments will be classified as balanced; but there can be a big difference in the risks of investing in different balanced options. A balanced option with 75% of money in growth investments that are mostly shares would be expected to be a higher risk than a balanced option with 60% of money in growth investments that are spread between property and shares. This means you should read the Product Disclosure Statement when you choose a superannuation fund or an investment option from inside a superannuation fund to make sure you really understand the investment risks you’re taking. But what does this mean for rural and regional Australians? Because our income can be so uncertain we might have to take this into account when choosing an investment option. Broadly, there are two extremes of opinion. The first is that we should invest in high risk and high return investments to make up for income we might lose through every day risks. The other is that, if your income is at risk, you should protect your super because you might really have to depend on it. Both points of view are valid (and all others in between). What each of us should do is work out where we sit and make sure the superannuation fund we choose is set up to provide the type of investment risk and reward we want. Prime Super takes the view that many rural and regional Australians want their super protected from unnecessary investment risk. This means the Trustee invests at the lower risk end of cash plus, capital stable, balanced and managed. We expect this will produce lower investment returns during good years, but relatively higher investment returns in bad years. Over the longer term, members should receive a good investment return from each investment option with lower than average risk of making a loss compared to other investment options of the same type. This approach isn’t for everyone and, because individual preferences matter, Prime Super will introduce a new range of investment options in January that allow each member to adjust the Trustee’s conservative approach to meet their own investment risk reward profile. We will then each be able to consider how much or how little investment risk we want to take. Disclaimer |
