As an Australian expat planning to retire back home then your superannuation will likely be one of the most tax-efficient vehicles for you to save for and provide for your golden years. Despite constant and perhaps poorly-communicated changes to the superannuation system by the Australian Government, it’s important that as an Aussie expat you pay attention to your super, even while you’re offshore.
A recent article in the Australian Financial Review (AFR) revealed that risks inside an Australian superannuation fund may actually be significantly different to what you might expect. This may actually mean that while your risk appetite and tolerance may be extremely low, your superannuation may not be invested as conservatively as you might expect.
Let’s first start with the basics.
When it comes to measuring the risk of a portfolio, one common metric is the volatility or movement over time of the valuation. This is largely influenced by the overall allocation of the fund to the various asset classes. There are four main asset classes, and the expected return of each rises as the expected risk (volatility) increases. This is outlined in the table below:
As you can see in the table, the lowest risk asset class is cash, and the highest risk is in equities / shares. You can also see that the expected return is higher for equities and lowest for cash, which illustrates the risk-return relationship of the various asset classes.
This is important to understand as the allocation between the defensive asset classes (cash and fixed interest) and your growth asset classes (property and equities) is a large contributor to determining the overall level of risk of your portfolio. A Balanced portfolio for example, should have anywhere from 40 – 50% invested in defensive assets, as the name ‘balanced’ suggests.
When was the last time you reviewed your superannuation investment strategy?
As an Australian expat, even if you’re not contributing to your superannuation, it’s important to review how your super is invested. You can check on the investment strategy yourself by reviewing your current investments and exploring what your overall asset allocation is. Does it align with your overall level of risk tolerance or is your ‘Balanced’ portfolio actually holding 90% of your funds in growth assets..?
Many Aussie expats won’t have looked at their investment options inside superannuation since their first serious job. The trouble with this is it may have been some time ago and chances are, your risk profile and life circumstances may have changed substantially. It’s also important to consider how your superannuation investment strategy ties in with your other investment assets. You may own direct property in Australia or elsewhere, other shares and investment funds or other alternatives, so it’s important to review the overall balance sheet together.
Why should I be concerned about risk inside my super fund?
When markets are rising, there’s nothing more exciting than being an aggressive investor. Even the more conservative investors among us start to compare portfolio returns with those that are 100% invested in small-cap stocks, instead of a more appropriate benchmark, and this can often lead to poor decision making. However, the real danger lies in times when markets are in decline.
When the Global Financial Crisis hit, a growth portfolio that is heavily weighted toward equities would on average have lost over 30% if no changes were made. For those of us with a high level of risk tolerance, this is not an issue as we expect that over time the value will bounce back, and instead we know that we should be using the opportunity to buy more at lower prices. However, if you have a low level of risk tolerance, chances are you will be heading for the doors and cashing out of your growth assets because the world is coming to an end. This means that you don’t ride the market back up when it eventually does turn around and your losses remain.
This highlights the true danger of not aligning your own superannuation investments with your risk profile. If you’re not sure of your own risk profile, there are many risk profile questionnaires around, however this really is just the tip of the iceberg. If you have a financial adviser, ask them to discuss with you what your current risk profile could mean in terms of a market downturn. If you don’t, consider the following thought:
Let’s assume that you have $100,000 invested in a diversified portfolio and you’re meeting with your investment manager to review the performance. For dramatic effect, let’s assume this is on the 25th floor of a Raffles Place office tower. Now, consider how much your portfolio could have fallen by that year before you would want to throw your investment manager out of the window.
This may be an interesting way to measure your level of risk tolerance, but you will quickly find how much you can withstand as a downturn and from which point emotion will start to drive your decision making.
What should I do next?
Now that you hopefully know why it’s important to understand the level of risk within your superannuation, it’s important to review your investments and review your overall superannuation strategy. You can download the Super for Expats guide from Atlas Wealth Management here, which will provide you with some helpful tips and insights.
If you’re not sure how to get started, reach out to a qualified professional to give you some pointers and help you to review your superannuation strategy. Investing the time today to review your retirement strategy can pay off many times over in your golden years.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Adviser with Australian Expatriate Group, specialist division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian expats in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.