There may be no stronger force in investing than the fear of missing out.
Over the past 12 months, Australians have watched stock prices soar, fuelled by cheap money and record government stimulus. The S&P/ASX 200 Index is 23 per cent higher than a year ago.
Buoyed by the prospect of achieving record returns, an increasing number of investors are asking financial advisers: should I shift more of my superannuation into shares?
Financial Framework director Dan Hewitt understands why people consider dialling up the risk in their portfolios. ‘‘Because you get paid nothing for having your money in the bank, we are getting a lot of inquiries from people asking what do we do with our money?’’ he says.
BFG Financial Services managing director Suzanne Haddan is fielding similar calls. ‘‘People’s term deposits are generating very poor returns, and they look at the past year in their growth funds or their direct shares, and are keen to consider moving up the risk scale,’’ she says.
The sentiment is understandable.
Over the past 10 years, international shares returned 13.7 per cent a year, while fixed-interest assets yielded annual returns of just 4.9 a cent, AustralianSuper data show. Cash has generated annual returns of 2.2 per cent.
But Matt Sherwood, Perpetual’s head of investment strategy, wants people to be cautious about increasing their exposure to risk assets such equities. ‘‘People can easily be seduced by high returns, and they typically are at the wrong point in time,’’ he says.
He notes stock prices globally have risen 60 per cent since their trough in March last year, while earnings growth has been close to flat. ‘‘That means a lot of good news is in the share price, and at the moment, economic growth estimates for this year and in the second half of next year are being cut, and both fiscal and monetary policy is being withdrawn in the US.
‘‘Therefore, people have got to realise when markets are priced to perfection and growth estimates are being cut, that the path to another major leg-up in prices is very narrow.
‘‘Considering COVID is still evolving, markets have frothy prices, bond yields are likely to rise and growth estimates are being wound in, I’d be saying now is the time to remain cautious about risk assets, rather than adding more to portfolios.’’
Likewise, Financial Framework’s Hewitt says the ‘‘easy money of the recovery trade’’ has been made. As a result, investors need to be more selective about their equity exposure.
Despite Hewitt’s concerns about market valuations, he is not predicting a crash any time soon. ‘‘I think there are so many tailwinds, like the amount of government stimulus, low interest rates, low oil prices, a return to ‘normal’ with travel. We have seen the recovery, but we haven’t seen the party times, which are usually the last stage of a bull market,’’ he says.
Still, given the surge in share prices over the past 12 months, it is an ideal time for savers who never, or rarely, look at their asset mix to check whether their allocation is appropriate.
‘‘Have a close look and see if the way your assets are set up now is the level of risk and asset allocation you need and want,’’ BFG’s Haddan says.
One group whom advisers say should heed warnings of being cautious about directing more money into high-risk investments is people in or nearing retirement. Savers in this group are recommended to keep a decent chunk of their super in defensive assets, such as fixed income and cash.
But determining the right split between risk and reward is not easy, says Haddan.
‘‘Taking too little risk means your money doesn’t last. You won’t have enough to keep your lifestyle long-term,’’ she says. But take on too much risk ‘‘and you could find yourself losing sleep’’.
‘‘In retirement, if you’ve got to withdraw when markets crash, you won’t be able to recover from that.’’
For those who want to dial down the risk in the lead-up to retirement, Haddan recommends doing so gradually, rather than off-loading growth assets in one fell swoop.
Financial Framework’s Hewitt says people looking to shift to a more defensive portfolio should consider boosting their allocation to infrastructure, rather than cash or fixed interest.
‘‘Infrastructure assets do sit within the growth part of your portfolio, but because of the nature of the assets they are often monopolistic, like airports, and have predictable income streams because they’re usually on long-term government contracts ... in a world where people are chasing growth, some of these assets that are a little out of favour, like airports, we think there’s value.’’
The easiest way to invest directly in infrastructure is by joining a fund with an explicit infrastructure investment option. Super funds with infrastructure options include NGS Super, which has just abandoned a merger with Australian Catholic Superannuation, and Hostplus. Cbus has an infrastructure portfolio, which contains listed and unlisted investments, within the self-managed part of the super fund. It aims to deliver annual returns of 3.25 per cent above the rate of inflation after tax.
Regardless of your risk appetite in retirement, Haddan says pre-retirees should keep at least five years’ worth of expenses available in cash or term deposits, in case something unexpected happens. ‘‘So if you’re going to need $65,000 a year for example, assuming you’re not getting anything from the government, you’re going to want to have a few hundred thousand available.’’
Story Wealth Management chief executive Anne Graham says for most retirees, the typical portfolio allocation is about 40 per cent to 50 per cent in defensive assets, such as cash and bonds.
Hewitt warns people against increasing their stake in defensive assets beyond 60 per cent of their total portfolio. ‘‘There is significant opportunity cost to sitting on the sidelines,’’ he says.
Indeed, even small differences in investment returns can have a large impact on a saver’s super balance, especially for young people. A fall in average returns to 8 per cent from 9 per cent would reduce a super balance by about $200,000 over 40 years, the Australian Securities and Investment Commission’s MoneySmart calculator shows.
Graham says young people shouldn’t be afraid to boost exposure to equity markets in the current climate.
‘‘I’d argue that younger people should take more investment risk with their super because they’ve got time on their side, and they tend not to look at it regularly, which means they won’t be influenced and have knee-jerk reactions to what markets are doing,’’ she says.
It is a sentiment echoed by the number crunchers at the Productivity Commission, who wrote in 2019 that young people would be better off in portfolios that were overweight equities.
‘‘Over the long run, all but the very worst outcomes for portfolios exposed to risky assets outperform conservative portfolios as would be expected given the equity premium,’’ the Commission wrote. ‘‘So even if the downsides occur, the average growth in riskier portfolios over a working life will mostly beat safer strategies.’’
Graham says young people can even invest in portfolios that are 95 per cent to 100 per cent equities, or make it simple by selecting the high-growth option in their super fund.
‘‘That would be a combination of international and Aussie equities,’’ she adds.
For example, moving from Australian-Super’s balanced investment option to its high-growth product would boost your allocation to equity markets to 67 per cent from 52 per cent, increasing annual expected returns to 10.6 per cent from 9.8 per cent.
Many super funds also have Australian shares and international shares investment options.
Otherwise, BFG’s Haddan says an easy option for young people is to put their super in a life-cycle product, where members are grouped into cohorts based on their decade of birth.
Life-cycle products put younger people into higher-risk portfolios by default, and automatically reduce their exposure to growth assets as they approach retirement.
Haddan says the one cohort of young people who should consider reducing their allocation to growth assets is anyone intending to make use of the government’s First Home Super Saver Scheme, which lets people withdraw up to $30,000 of voluntary super contributions to purchase their first home.
‘‘In that case, if you know you’re going to be looking to buy a home in the next year or so, there’s a reason why you might want to isolate some of the money to lower risk assets,’’ says Haddan.
‘‘If you’re going to need to access it, you don’t want it sitting in growth when you’re going to imminently be taking it out.’’
But taking on more risk does not mean introducing leverage into your super portfolio, which is possible with self-directed and self-managed funds, says Haddan.
‘‘I generally see super as something that you shouldn’t be excessively amplifying your risk because eventually, you have to be able to sell out of it,’’ she argues.
‘‘Quite often if you’re going to leverage, it’s better to do it outside super in your own name.
‘‘If you’re leveraging, you’re often trying to negatively gear, and negative gearing means your cost exceeds your income and you claim your deduction on your tax return,’’ Haddan says. SI