Industry superannuation fund AustralianSuper surveyed people between the ages of 18 and 64 on their level of understanding of the key investment risks in relation to their superannuation.

The poll showed that more than 50% of young respondents – that is people aged between 18 and 34 – would choose an investment option labelled “low risk”, despite the fact that these options may not earn much more than the rate of inflation. Similarly, 56% of people of all ages would choose a “low risk” investment option.

Among the different asset classes, low risk typically equates to something like cash or fixed interest – which does not grow as much as the other options and has the lowest expected minimum balance of all options – whereas “medium to high risk” implies a more growth-oriented option.

The table below shows projected outcomes for a member with 40 years to retirement, earning an annual income of $52,000 and with $24,000 in superannuation.

Further, the poll showed that:

• less than 50% of respondents would seek more information about investment options labelled “high risk”

• 25% of respondents would change out of an investment option classified as “high risk”, and

• 29% of young people either did not know what a “low risk” investment was or incorrectly thought it would provide them with enough money in retirement.

The lack of awareness about investment risks is evidenced by another fact that surfaced from the research – less than 25% of respondents recognised that there are two main risks when it comes to superannuation saving:

• volatility – the fluctuation of the investment markets, and 

• inflation – the risk that investment returns do not sufficiently outpace the rise in the cost of living.

The AustralianSuper paper concluded that many Australians’ long-term superannuation savings could be affected by the lack of understanding of the two main risks. It said that generally different people have divergent savings objectives and savings timeframes, so the key risks for an investment option vary from individual to individual.

For example, for a 55 year old who is not going to keep their super invested in their retirement, a “low risk” option may be part of a sound investment strategy, but for a 25 year old who has another 40 years of saving ahead of them, this may not be the optimum choice.

AustralianSuper said part of the problem lies with superannuation funds being standard risk labels on volatility without taking inflation into account. As a result, an investment option labelled low risk only considers one of the key investment risks – low volatility of returns.

The super fund compiled a list of tips to help people understand their investment risk:

• consider how long you will be invested for – typically, the longer the timeframe the less your savings will be affected by volatility and short term ups and downs in the market

• look carefully at the risk label on investment options as they may only be a measure of volatility, which is a short-term risk

• look at the objectives of each investment option in relation to the consumer price index

• check the track record of your super fund but bear in mind past performance is not a guarantee of future performance

• go online – many super funds have investment risk quizzes, webinars on investment basics and calculators so you can see the impact of different options.

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