Here's why your superannuation is invested predominantly in shares

Many people feel a bit iffy about investing in shares. This is mainly because of the share market's inherent short-term volatility versus the more stable but comparatively illiquid option of property investment.

The thing is, if you work in Australia, then you're already a share investor through your superannuation.

Most superannuation funds invest a majority chunk of members' money in ASX and international shares.

This is how most Australians' retirements are funded. If share investing wasn't a successful way of building wealth, super funds wouldn't do it.

Look at the track record of superannuation returns in our country.

According to Chant West, the median growth superannuation fund has delivered an annualised return of 7.9% since superannuation was introduced in Australia in 1992.

The median growth superannuation fund invests 61% to 80% in growth assets like ASX shares and international stocks and the rest in defensive assets like bonds and cash.

Here's why your superannuation is invested in shares

In a recent blog, AMP chief economist and head of investment strategy Dr Shane Oliver explains that superannuation funds invest mainly in shares because they do incredibly well over the long term.

Dr Oliver said:

While growth assets like shares go through bouts of short-term underperformance versus bonds and cash, they provide superior long-term returns.

So, it makes sense that superannuation has a high exposure to them.

By nature, superannuation is a very long-term investment. In fact, it lasts as long as you're in the workforce. You can't touch that money unless you're in serious hardship or have major health issues.

Most of us work between the ages of 18 and our mid-60s, so we're talking about a superannuation investment timeframe of more than four decades. When you have that long a time horizon, it makes sense to invest heavily in assets that perform best over the long term.

Dr Oliver explains that the main reason shares do well over the long term is compound interest. This means reinvesting your superannuation returns every year to generate additional returns in the next.  

He says:

On a rolling 12-month-ended basis the returns from shares bounce around all over the place versus cash & bonds.

Over rolling 40-year periods – the working years of a typical person – shares have always done better.

This is consistent with the basic proposition that higher short-term volatility from shares (often around periods of falling profits & a risk that companies go bust) is rewarded over the long term with higher returns.

How do you maintain a long-term view with investments?

Lack of access

Thankfully, we are forced to maintain a long-term view with our superannuation investments. We're not allowed to access that money, so we have no choice but to stay invested in shares.

However, you do get a say in how your superannuation fund provider invests your money. Workers can typically choose between several pre-mixed strategies offered by their funds.

Some are conservative and involve less risk, while others are growth-focused and involve more risk.

Workers who provide no instructions are automatically invested in a 'balanced' strategy. That means your savings are spread across a variety of both growth and capital-preserving asset classes.

Don't look

Dr Oliver says another way to maintain a long-term view is to avoid looking at your shares too often.

He says:

So, day-to-day, it's pretty much a coin toss as to whether you will get good news or bad when you tune in for the nightly finance update.

But if you just look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time.

And if you only look each year, you will only get negative news 20% of the time for Australian shares and 27% of the time for US shares.

And if you look just once a decade, positive returns have been seen 100% of the time for Australian shares and 82% for US shares. 

While it's a good idea not to look at individual stock values too often, it's important to monitor your superannuation fund's overall performance.

This is because some superannuation funds have a better track record than others. They make better investment choices on your behalf, and therefore deliver superior returns year after year.

Superannuation funds all charge different levels of fees, too. These eat into your returns. If you're paying a high fee, you want to ensure you're receiving a better-than-average return! So, monitoring is important.

ChantWest recently published a list of the top-performing superannuation funds over the past 10 years. Check out the numbers here and compare them to your own superannuation fund.

Top 10 superannuation funds of the decade

Note: Performance is shown net of investment fees and tax but before administration fees.