Tuning into your super fund's risk

Know thyself is one of the unwritten commandments of investments.

This year's superannuation statements could prompt an outbreak of self-awareness that is unprecedented in the history of our compulsory super system.

Depending on your investment risk profile and account balance when you open this year's statement your super could have fallen anywhere from 8% if you had a traditional balanced portfolio profile or more than 30% if you had been more aggressive on equity markets.

Now if any investment is for the long-term it is super and a negative year every six or seven is normal. But as account balances grow market falls have much more impact.
Think of it in car terms - for the person with $250,000 in their super fund with a balanced portfolio the markets have just cost you a new Hyundai. For the more aggressive equity investor it's more like a BMW or Audi that just drove out of your super fund's garage.

Given that behavioural finance studies suggest that people really begin to take notice of their super once the account balance gets above the value of replacing the average car it is probably reasonable to think that this year's super fund statements will be looked at very closely - and answers required from funds on why the performance is what it is.

But while our super system is mandatory - the 9% super guarantee contributions - there is a lot of choice within the system to ensure your super is being managed the way you are comfortable with. While most people are still in default funds the evidence is building that members are exercising more choice. Of course there is a considerable danger that in a bad return year like this one that there is a knee-jerk reaction with people rushing for the safety of conservative investments after the proverbial market horse has well and truly bolted.

So before making any emotionally-driven changes to your super fund portfolio take the time to work out your risk profile. There is probably no better environment than this to truly understand how you are feeling about sagging investment returns.

A year ago the world was a very different place in terms of consumer sentiment, petrol prices and we were comfortably oblivious to what a "sub-prime" mortgage was.
The question is how do you measure your risk tolerance? There is considerable debate in the financial planning community about risk profiling tools but one of the most established tools has been developed and refined over a number of years by FinaMetrica. A version of its psychometric tool has been made available for free on a new website - www.sleeptightmoney.com.au.

The simple quiz of 25 questions gives you a score compared with a representative sample of the Australian adult population who have also taken the quiz with the aim of helping you be more aware of your appetite for risk and how you compare to the 'average' person and their attitudes to money and in particular investment risk.

The quiz gives you a score out of 100 which can be classified in terms of a range of portfolios from conservative through to aggressive. Scores between 41 and 60 are regarded as "average" although there are no right or wrong answers and it is certainly not a competition to see who can get the highest score.

Your profile score can then be lined up with common super fund portfolios - conservative, balanced, growth and so on.

So if your super fund statement has caused you to reconsider how much risk you are comfortable with consider the FinaMetrica test to give you a scientific way of measuring your risk appetitive against the wider context of the Australian population.