Investing your savings rather than spending it can be challenging at the best of times. A good place to start is moving from a savings mindset to an investing mindset.
Saving is a passive strategy for your money - watching your bank account creep along at a low interest rate, or worse, hoarding your cash only to see it eroded by inflation.
Investing is an active strategy of putting your money to work - for you. Your super investment, for instance, is invested by your fund on your behalf. But that’s only after you decide which option it gets invested in and how much risk you’re willing to take.
It can help to look at some key differences between saving and investing (note: this table is general information and should be used as a guide only).
|Usually better for short term goals like a holiday or a new car||May be better for larger long-term goals like children’s education or your retirement|
|Easier to withdraw your money (subject to account rules)||Typically less liquid as you need to sell your investments|
|Lower risk – government guarantees bank deposits up to $250,000||Higher risk – you may lose all the money you invest|
|Earn steady interest – usually around 1-3% per month||You can earn high returns over the long term – e.g., shares typically return 7-8% p.a. over the long term1|
|Interest may just keep pace with inflation||Interest may outpace inflation|
|No minimum balance||Minimum parcel of $500 (ASX)|
|Usually no monthly/annual fees||Investment fees|
A growing trend
Investing is no longer the preserve of the wealthy few. Today, investing is something most people do through their super or surplus savings, or both. According to the ASX2:
- 47% or 9 million Australians hold investments outside their home or super.
- Of those investing, 74% hold listed investments and 60% are in diversified investments.
- Of those investing in the last 12 months, 45% are women.
- 63% of Australians are open to receiving financial advice.
In the last 12 months, younger investors are most likely to make significant shifts in their portfolios, while older investors are more inclined to stick with their investment strategy.
How can you invest?
There are lots of ways you can invest. It can be through your super, paying your home mortgage, investing directly in shares, property, or bonds, or in non-traditional assets like gold, art, or even vintage cars. Or it can be a combination of all of them or more.
One of the great things about investing is that it’s flexible. You can invest a lot of money at once or a little at a time as is the case with your monthly super contributions. Another great thing is that investing is your friend – it works for you. You earn a return on your initial investment (capital) and on the additional amounts you invest. Your return will be the money you can make (capital gain) or lose (capital loss) plus the income you receive from say dividends or interest.
The chance of a capital gain or loss, your actual return versus expected return, and fluctuations in your returns, reflect your investment risk. Shares tend to be higher-risk investments than say property or bonds because share returns typically fluctuate more than bonds over time, especially over the short term (one to three years).
Your investment time horizon is key. The longer you invest your money, the more you can ride out the ups and downs (volatility or riskiness) of your investment. Because shares are by nature a volatile or risky asset class, its investment time horizon is at least seven years. Bond returns typically fluctuate less than shares albeit with lesser returns, so their investment time horizon is less (at least three years). Property returns typically fluctuate less than shares but more than bonds, so its investment time horizon is at least five years.
You may choose to invest your super in a range of asset classes with different risk-return profiles. This is called a diversified or balanced portfolio like the Aware Super High Growth, Growth or Balanced options. Or it may be invested in a single asset portfolio like the Aware Super Australian Equities option. You may prefer to invest long-term in shares or shorter-term in cash and bonds.Learn more
The ‘superpower’ of compound interest
Another great thing about investing is that it has an inbuilt ‘superpower’ called compounding.
Compounding is when you get extra money on the money you’ve already invested. Receiving interest on interest already earned, for example, or receiving earnings on accumulated earnings. It’s probably one of the only true ’free lunches’ in investing, provided interest rates or earnings rates are positive. Albert Einstein in his infinite wisdom noted that: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Compounding works very well with your super because it’s more effective the longer you're invested. This is illustrated in the chart below for a $10K initial investment (principal) over 30 years. The light grey area is the extra interest ($30K) accumulated through compounding. The dark grey area is the principal which remains unchanged throughout the life of the investment.
Using the chart as a reference point, a $100K super balance as principal, compounded at 5%, would yield $400K over 30 years. A higher earnings rate (investment return) plus additional super contributions would provide an even better result, all else being equal.
How does Aware Super grow your wealth?
At Aware Super, we take a ‘Responsible Ownership’ approach to managing your super investments. This approach is underpinned by 1) our focus on delivering strong long-term investment returns above inflation; 2) our belief that active asset allocation can add value in an investment portfolio; 3) that investing as a ‘force for good’ helps improve outcomes for our community and environment.
Our Responsible Ownership approach is underpinned by some additional investment beliefs:
- Robust and transparent investment practices make a difference.
- Being a responsible owner adds value. A long-term mindset is an advantage.
- Scale advantages can help reduce costs and increase the range of investment opportunities.
How we manage your investments
If you’re unsure which option is right for you, you can get simple financial advice, either over the phone or face-to-face, by booking an advice appointment with us.
1 Past performance is not a reliable indicator nor is it a guarantee of future performance. The value of investments can rise or fall.
2 2020 ASX Australian Investors Study
This is general information only and does not take into account your specific objectives, financial situation or needs. Seek professional financial advice, consider your own circumstances and read our product disclosure statement before making a decision about Aware Super. Call us or visit our website for a copy. Issued by Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430. Please click on the links to the general advice warning and conditions of use for this website