The alternatives can feel endless. While asking your super fund to put your retirement saving into a high risk option can bring you a greater return, it might make you lose sleep at night. Meanwhile, more conservative investments play it safe but offer less potential for growth.
Anne-Marie Corboy, CEO of healthcare-focused super fund HESTA, says that everyone’s risk tolerance is different, depending on their own personal circumstances and mindset.
“Ensuring your risk tolerance matches your investment choice is key,” she says.
With that in mind, here are some tips for how to determine your investment personality.
1. Seek advice
Sharing all of your fears, concerns and confusion with someone else will help you to clarify your preferences. Many firms offer free advice and you can even have over-the-phone consultations to save time.
Greg Harper, general manager of advice services at CBUS, says that common sense can go “a hell of a long way”.
“The most important thing to do is make an informed decision,” he says.
Use the resources available to you to figure out your priorities and then work from there.
“Some funds provide online risk profiling calculators, designed to help members consider and understand their risk tolerance,” says HESTA’s Ms Corboy.
“They can help clarify your investment goals and timeframe, your experience level as an investor and your tolerance of a potential short-term fall in the value of your investments.”
2. Consider your objectives
Ultimately, you have to visualise yourself in retirement and figure out what kind of lifestyle you want to have. Do you want to live large? Leave some money behind for your kids? Buy a new home?
Chris Morcom, director and private client adviser at Hewison Private Wealth, says that it’s a good idea to figure out how much you need to accumulate to fund your retirement and in what timeframe.
Work back from that point and figure out how much money you need your various investments to make. Remember that after you retire the money still has to last you an average of around 20 years.
“You have to be careful about your investments all through your life,” says Mr Morcom.
“Ensure you have enough income and enough growth in value to live off and offset the impacts of inflation over time.”
3. Be aware of your emotions
It’s time to talk about feelings. Knowing yourself and your temperament is crucial to knowing what investment option is right for you.
“It’s important to take into account how you will cope with movements in your investments,” says Mr Morcom.
“Can you cope with movement and volatility? Seek advice if you’re someone who is likely to panic at the first sign of change because you need someone you can bounce your ideas off before you do something drastic.”
Sometimes even the best investment choice can be ruined by a rash reaction when things go sour.
“It’s not just the informed decision you need to make it’s what happens thereafter,” says CBUS’s Mr Harper.
“Patience and being prepared to work through volatile periods is important.”
Panicking and selling your assets could lock you into a loss. Sticking to a risky investment for the medium to long term will be your risk mitigator. Basically, make sure you’re aware of the worst case scenario and know that you will still be committed to your choice even when things are going downhill.
“At the end of the day it’s all about the pillow test,” says Mr Harper.
“Regardless of market volatility or current events, are you able to put your head on the pillow at night feeling confident you made the right decision?”
4. Act your age
With the life expectancy creeping up year by year, we all have a longer period of retirement ahead of us. This also means we have a greater horizon for investment and thus can accommodate more volatility.
The general opinion is that younger people should definitely take more risks with their investments because, well, they can!
Andrew Proebstl, CEO of legalsuper, says that people of retirement age are more likely to make more conservative choices.
“Young people have a long investment time horizon before they retire, so they are better placed to invest more aggressively in growth assets like shares or property,” he says.
However, be aware of your time frame and the amount of capital you have.
“Some retirees can take on more risk and expose themselves to growth assets in one investment because they have others that can sit without being drawn on,” says Mr Harper.
Mr Morcom agrees that having all of your money in conservative investments at the time of your retirement is “dangerous” because there is little potential to grow your wealth. Make sure you have a healthy risk, perhaps more skewed towards riskier investments if you have the time or capital.
5. Overseas or domestic?
When you invest in Australian shares there are imputation credits attached to the dividends you receive, which is a favourable tax benefit when compared to other investment types. However, the overseas share universe has a much larger pool of companies.
“In some ways overseas shares give you a higher level of diversification,” says Mr Proebstl.
“This can minimise your exposure to particular risks.”
Consider the benefits of each and decide which option is more appropriate for you.