Cash has been crunched in superannuation as record low interest rates shrink financial returns for conservative fund members.
Whether your nest egg is self-managed or in a retail or industry super fund, if it’s been mainly sitting in cash you have missed out on healthy gains delivered by diversification.
Gone are the days of 7 per cent term deposits, which were offered just five years ago, and many experts expect slim cash returns for a long time. Today’s deposits pay about 2.5 per cent.
The fast-growing self-managed superannuation sector looks to be the hardest hit by the cash crash because members usually make their own investment decisions. The non-SMSF set should also check that their savings are not dominated by cash, but most already have a spread of investments through funds’ default investment options.
Australia now has almost 550 million SMSFs with more than one million members. Official figures show SMSFs hold about 28 per cent of their money in cash compared with 14 per cent cash for typical retail and industry super funds.
International shares — a top-performing asset class in the past five years — represent less than 1 per cent of SMSF assets compared with 22 per cent for other funds.
BE PROACTIVE
Barbara Smith, CEO of Oasis Wealth and author of new book Keep it Super Simple, says cash returns were nice for people 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 more proactive.”
Smith says people need to do their research and “always keep yourself close to your money”.
Direct share investment is popular in SMSFs but there are other options where you don’t need specific knowledge of companies. Exchange traded funds offer low-cost exposure to a variety of investments, spread your money across many assets, and track the investment returns of a particular index such as Aussie shares, overseas shares, metals or other commodities.
HELPFUL RESOURCES
Online share trading websites such as CommSec have more information than ever 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,” she says.
Andrea Slattery, CEO of the SMSF Association, says the claim that SMSFs invest mainly in cash is “a furphy”. She says SMSFs get a lot of international exposure through investing in Aussie companies with big offshore earnings, such as 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.”
Self-managed does not mean doing everything yourself, and external advisers are important.
“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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Originally published as Cash is not king when it comes to your super