Superannuation research group SuperRatings has told West Australians to grasp their risk tolerance as financial markets demonstrate heightened volatility.
With a late-quarter burst having saved share markets from consecutive-year losses, SuperRatings executive director Kirby Rappell said learning about risk tolerance could help people understand how they might cope with a downturn.
He pointed to risk-profiling tools as they are becoming available on super fund websites as a way to learn about “how much risk you are willing and able to take”.
Mr Rappell said these tools typically indicate how people might cope with a negative return, how they will deal with their balance jumping around and how much preference they give to the highest return possible.
“People may find they don’t like these factors but are willing to live with them, while others are not willing to tolerate them as much,” he said.
“Trying the risk profile tools of a couple of reputable funds to see how they compare will give you a good guide of where you sit.”
The rule of thumb with people’s investment and superannuation profiles is that they should be able to deal with a higher level of risk when decades away from retirement in a bid to maximise their eventual returns.
And people’s risk profiles should decrease as they get closer to retirement and after they give up work because they have less capacity to tolerate a crash in the value of high-risk assets.
But set against this is an array of psychological, personal, lifestyle, financial, tax and even estate planning factors that can push up or down the best risk profile for super and other investments.
As Mr Rappell said, the notion that young people should be able to take more risks with money does not hold true for everyone.
“Depending on a person’s life experiences with money and their underlying beliefs, they might be much less willing to take risks,” he said. “Some people probably seek risk.
“So, it means that learning about your risk tolerance is really important along with your return.”
Grappling with these factors is the lifeblood of good financial advice, but it can be hard to find a good adviser nowadays because of the industry’s purging over the past decade.
The online calculators provided by superannuation funds have varying sophistication and are not at the cutting edge of risk assessment technology.
The Australian Retirement Trust calculator asked five basic questions that, somewhat predictably, led to a growth profile for someone chasing big returns and who says they they wouldn’t panic if their super fell from $50,000 to $45,000.
It gave a conservative rating for someone who wants steady returns and would move to a more stable option if their super fell a relatively modest 10 per cent, while someone in the middle was given a balanced rating.
Australian Retirement Trust then led on to investment options that included so-called life-cycle investment strategies that generally lower risk with age.
HESTA’s survey is more detailed, with details about an individual’s income, debt, budgetary skills, the need to pay down a mortgage as well and reaction to market volatility, notably a global-financial crisis-like 20 per cent fall in one’s super balance.
It gives a measure that puts people on its risk scale of cautious, moderate, ambitious and very ambitious, plus explains how investment should be split and examines growth timeframe.
HESTA then tries to pitch users towards its advice team.