By Ninda Hendy
The content is produced by the Good Weekend in commercial partnership with MLC.
When it comes to our nest egg, some of us are happy to simply rely on the wonders of compound interest to grow the balance. Others, meanwhile, leave it up to their super fund to take a few calculated investment risks on their behalf, confident it will pay off later.
How we feel about the financial risks that we take to grow our superannuation is known as risk tolerance.
In simple terms, an investor with a high-risk tolerance is more likely to risk losing some money occasionally in order to get better long-term results.
An investor with a low-risk tolerance, however, tends to favour investments that are more likely to preserve their original investment.
Risk tolerance is determined by a combination of factors, including your financial experiences, investment goals, what sort of retirement you would like to enjoy and how much time you have to invest.
Understanding your individual risk tolerance is an important step in understanding how super works. Investing based on your tolerance can have a big impact on the money available to you later in life, so it’s well worth taking the time to understand it now.
Growing an appetite for risk
Sydney couple Kiri Yanchenko and Wesley Taylor, founders of Australian skincare brand Amperna, have poured everything they have into their business, both personally and financially. And they are serious about growing their super.
The small business owners contribute 10 per cent of earnings each month to their super to mirror what they would be receiving if they were employed, based on the current national super guarantee.
Yanchenko says her appetite for risk has improved over the years, after watching her parents fight to keep the family home back in the 1980s. At the time, interest rates were hovering at an eye-watering 17 per cent, so making mortgage repayments was tough. Conversations about money were rarely positive, she says.
“That experience definitely determined my appetite for risk. I grew up erring on the side of caution when it came to money,” Yanchenko says.
But her husband, Wes, had a different experience growing up, and together, they decided it was worth taking a few calculated risks with some help from a financial planner.
Their super is diversified into both international and Australian shares, property and cash investments – and it has paid off already, with the couple well on track to retire comfortably.
“At the moment, given our age and where we are in life, we have a higher risk tolerance. So, we’re investing in high risk options,” Yanchenko says, adding that
they have organised quarterly reporting from a financial adviser to keep a close eye on progress.
“There’s some movement in our super balance each quarter, but in our view the longer term financial rewards far outweigh the risks.”
Determining someone’s risk appetite is an important part of the job for MLC principal financial adviser Pete Brewster. He does this by asking customers a series of questions, before recommending tailored investment solutions.
“With the right context we can understand what you want to achieve and how this fits with your risk tolerance,” he explains.
“It doesn’t make any difference whether you’ve got a lot or a little in superannuation. Either way, you need to understand how your approach to risk will impact your superannuation and investment balances.
“It’s about knowing yourself well enough financially to understand what you’re comfortable with and making sure the investments made on your behalf reflect your risk appetite,” says Brewster.
For example, asset types that investors with a high-risk tolerance might consider are Australian and international shares, residential and commercial property.
“It might even be appropriate for some who are still accumulating assets and have a long-term approach to borrow to invest or ‘gear’. These types of investments may come with a lot of uncertainty day to day, and some risks of short-term losses, with an aim to gain for profit in the medium to long term,” Brewster explains.
In contrast, investors with a lower risk tolerance typically seek more certainty and security, with the knowledge they can withdraw exactly what was invested at any time.
“Alternatively, assets like term deposits or fixed interest investments might be more suitable for people with a low-risk tolerance who are happier to receive a much lower return for their peace of mind, more certainty and less ‘ups and downs’ in the short term.”
It’s a valuable conversation for anyone to have. “Once your appetite for risk is understood, you can have more confidence around your financial future and make better decisions to build your nest egg,” Brewster adds.
Eric Blewitt, CEO of stockbroker AUSIEX agrees. Super is a long-term investment, so you should consider its performance over the longer term. It’s not conducive to apply short-term thinking by tracking the daily fluctuations of the market, he says.
As you get closer to retirement, your financial adviser can help you assess the risk profile of your investments. They can discuss how to best structure your portfolio, which may involve transitioning into assets that are more stable, but still produce good growth and income.
“After all, retirement for many is a 20-plus year outlook. You want your money to continue to grow in a stable manner, as well as being able to withdraw funds to enjoy your retirement,” says Blewitt.
“Planning for retirement is an important exercise that involves investment and tax considerations. It’s advisable to seek advice in both areas to set yourself up confidently for retirement.”