Key takeaways

• Understanding the different types of investments in super and how they work, can help you decide if your current investment approach is right for you
• A growth investment approach has the potential to provide you with higher returns, over the long term
• A defensive investment approach aims to provide investors with regular income. This helps to keep their values stable which means they have relatively low volatility or risk.
  

Three super options

Generally super funds allow their members to choose where they want to sit on the risk return spectrum. They usually do this by offering a choice between the following investment approaches.

Conservative

About a third of your super is invested in shares and property and the rest in fixed-interest investments.

Balanced

About 70 per cent of your super is invested in shares or property and the rest in fixed-interest investments. Over the longer term, you should enjoy better return than the conservative approach, but market downturns could result in big losses.

Growth

About 85 per cent of your money is invested in shares and property, with only a small fraction tucked away in fixed interest investments. More impressive returns are likely over long timeframes but a big sharemarket crash could see a large chunk of your retirement funds evaporate overnight.

Growth asset classes explained

Growth asset classes have the potential higher returns, over the long term, by increasing the value of an original investment.

Investment returns are more likely to fluctuate over a short period however, due to changes in the market and other economic factors. Common examples of growth assets are shares and property.

Shares

Shares are considered as a growth asset and aim to provide greater returns over a longer timeframe.
When invested in shares, an investor becomes a co-owner of the business - these could be household names like BHP, Telstra, and Amazon.

Returns from shares can be received in two ways:

• an increase in the company’s share price which makes an original investment more valuable, and
• dividends which are an investor’s share of the profits that the business makes.

On the flip side, share prices change daily so they present greater volatility and are considered higher risk.

Property

Property is also considered a growth asset as its value has the potential to grow over time and is one of few investment types that’s tangible — something you can see, feel and touch.

Broadly, there are three main ways someone can invest in property.

• Residential property: can be as an owner-occupier or investor. Values can change depending on demand in the market and supply of properties can be as an owner-occupier or investor. Values can change depending on demand in the market and supply of properties.
• Real Estate Investment Trusts: trade on sharemarkets, in the same way as shares do, and give investors access to commercial property.
• Unlisted Property Trusts: can also give access to properties through a trust, similarly to REITs. However, they are not traded on stock exchanges. When buying into an Unlisted Property Trust, an investor essentially buys a ‘unit’ in a Trust that holds the properties and the Trust is managed by an investment manager.
  

Defensive asset classes explained

Defensive asset classes aim to provide regular income. This helps to keep their values stable which means they have relatively low volatility or risk.
The downside to this safety is that over the long term, defensive asset classes usually deliver lower returns than growth asset classes. In addition, those returns may not be enough to protect you from the rising cost of living.

Cash

Cash is regarded as a defensive asset class given it generally doesn’t rise in value by much. It’s also considered to be one of the safest asset classes as it’s unlikely that an investor will lose money.
An investment in cash can be via a bank savings account or a short maturity term deposit, for example.

Fixed-income

The best-known type of fixed income investments are bonds. They are considered part of the defensive asset cluster as they usually have lower risk than shares or property.

When investing in bonds you’re essentially lending money to a government agency, if it’s a government bond, or to a business in the case of corporate bonds.

With a bond, returns come in the form of the interest received from the loan. When there are changes in interest rates, the value of the bond changes too. For example, when interest rates rise, bonds with lower interest rates are less appealing to investors so their value tends to fall. On the flip side, when interest rates fall, their values tend to rise.