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May 16

Default Super Funds

There’s been a little bit of publicity lately about the makeup of default super funds. I don’t have any statistics but my understanding is that most default super funds are the balanced fund which, strangely, is 70% invested in growth assets like shares and property. Given the overall lack of understanding of investment risk in our community this, to me, is obviously a far too risky portfolio to be the default fund for the average decision-shy employee. I read a letter to the Financial Review earlier in the week that suggested the default fund should be cash, due to its riskless nature. My guess is that the balanced fund has been chosen as it is perceived to be well diversified and with sufficient growth assets to outpace inflation. Inflation, of course, is the biggest risk associated with cash and bonds. Anyway, so where am I heading with this?

 

To me, both cash and the balanced fund are not appropriate as the default fund for the already stated reasons…1) the balanced fund is too risky and not appropriately matched to most people’s risk profile, and 2) cash (or bonds) are not appropriate due to the risks of inflation.

 

So what is my suggestion? Inflation Linked Bonds…that way the inflation risk is removed and the uninformed are not exposed to the massive volatility of sharemarkets.

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