The attached note looks at why super and growth assets like shares should be seen as long term investments. The key points are as follows:
- While growth assets like shares go through bouts of short-term under performance versus bonds & cash, they provide superior long-term returns. It makes sense that superannuation has a high exposure to them.
- The best approach is to simply recognise that super and investing in shares is a long-term investment.
After sharp share market falls when headlines scream about the billions wiped off the market the usual questions are: what caused the fall? what’s the outlook? and what does it mean for superannuation? The correct answer to the latter should be something like “nothing really, as super is a long-term investment and share market volatility is normal.” But that often sounds like marketing spin. However, the reality is that – except for those who are into trading or are at, or close to, retirement – shares and super really are long-term investments. Here’s why.
Super funds and shares
Superannuation is aimed (within reason) at providing maximum (risk-adjusted) funds for use in retirement. So typical Australian super funds have a bias towards shares and other growth assets, particularly for younger members, and some exposure to defensive assets like bonds and cash in order to avoid excessive short-term volatility in returns.
The power of compound interest
These approaches seek to take maximum advantage of the power of compound interest. The next chart shows the value of a $100 investment in each of Australian cash, bonds, shares, and residential property from 1926 assuming any interest, dividends and rents are reinvested along the way. As return series for commercial property and infrastructure only go back a few decades I have used residential property as a proxy.
Source: ABS, REIA, Global Financial Data, AMP Capital