Is your DIY super fund working hard enough?

DIY super can be a great way to build wealth for the future — but not every fund delivers the results its members expect. Here are some common reasons DIY super funds underperform.

DIY super is Australia’s favourite super choice, with around 488,000 funds managing over $458 billion in assets — almost a third of the country’s super savings.[1] Yet too many DIY funds don’t achieve the returns their members are looking for.

Here are some common reasons funds underperform, and what you can do about them.

1. Too much cash

The problem

With super guarantee contributions flowing in to your fund each month, it’s all too easy to let cash build up. And after the ups and downs of the global financial crisis, many funds are still taking a very conservative approach to asset allocation, holding a large proportion of their assets in cash.

According to the Australian Tax Office, the average DIY super fund held 28.6% of its portfolio in cash in December 2012. While that may make sense for older investors, it could limit the growth opportunities available to younger investors seeking higher returns.

The solution

Start by thinking carefully about your fund’s target asset allocation, creating the right balance between defensive and growth assets. Then actively manage incoming cash to stay close to your target.

One easy option is to regularly invest in a diversified managed fund or exchange traded fund that supports your ideal asset mix. A DIY Super Cash Investment Account can help, by giving you complete visibility of your fund’s cash, with a direct link to your CommSec trading account.

2. No cash strategy

The problem

No matter how growth-oriented your strategy, almost every fund will want to hold at least some assets in cash. That makes it important to get the most out of every dollar, even money that’s just parked between investments. You also need fast and easy access to your cash when it’s time to invest.

But while fund trustees often dedicate endless thought to their short portfolios, some may lack an equally well-considered cash strategy.

The solution

Make the most of short term cash by choosing a cash investment account with a great rate, plus instant access to your money. Then choose a higher yielding alternative for longer term holdings, such as a term deposit.

3. Too little diversification

The problem

Diversification is still the single best strategy for reducing volatility and smoothing out returns. But unfortunately, many Australian DIY super funds are highly concentrated in just a few asset types.

In December 2012, according to the Australian Tax Office, more than 70% of DIY super fund holdings were in cash, Australian shares or commercial property. Less than 1% were in debt securities such as bonds and debentures. And a tiny 0.9% were invested in overseas shares and other offshore assets.

The solution

Once again, the key is to have a well-considered asset allocation and to stick to it. That not only means investing in line with your strategy, it also means regularly rebalancing your fund’s holdings to make sure they stay on target.

Important information: The DIY Super Cash Investment Account is a bank account designed for use in conjunction with a Self-Managed Super Fund. It is not a superannuation product in its own right. Terms and conditions issued by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (CBA) for the DIY Super Cash Investment Account (Cash Investment Account) and Term Deposit are available from any branch or by calling 13 2221 and should be considered before making any decision about the product. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned, but non-guaranteed, subsidiary of the CBA. CommSec is a Participant of the ASX Group.

[1]   Source: Australian Prudential Regulation Authority, Quarterly Superannuation Performance September 2012, revised 30 November 2012.