Asset allocation is designed to balance risk and return in a super fund portfolio by adjusting how much the fund invests in different assets based on risk tolerance, goals and investment time frame.

The way in which an individual chooses to allocate their super to different asset classes is one of the most important investment decisions they can make. Finding the right asset allocation isn’t always easy, as the appropriate asset ‘mix’ for an individual will depend on a number of factors, such as how long they have until retirement and their attitude towards risk.

The main asset classes a super fund can invest in are shares, property, cash and fixed interest. Each asset class has varying degrees of potential return and risk.

Cash: Typical cash investments include term deposits, certificates of deposit, cash accounts, treasury bills, money market deposit accounts and money market funds. Cash is the safest asset class but offers the lowest return. The chances of losing money on a cash investment are extremely low.

Fixed interest: Fixed interest assets include government and corporate bonds, and fixed interest funds that invest in these securities. These assets offer a modest return that is generally higher than cash yet less volatile than stocks. Certain categories of bonds offer high returns and therefore greater risk.

Shares: Shares hold the greatest risk among all the asset classes, however, they provide the highest returns and greatest potential for growth. Shares can be very volatile in the short term but can generate strong positive returns over long periods of time if investors are willing to ride it out.

Property: Returns on property are usually higher since investors receive rental yields and the opportunity for capital growth through rising property values. Risks are also higher because property values can fluctuate. Property is also not a particularly liquid asset.

As different asset classes will perform better at different times depending on the underlying economic conditions at the time, it is important for a fund to invest in a diverse mix of assets.

Diversification aims to maximise an individual’s return by investing in different asset classes that react differently to the same event. Although it does not guarantee avoiding a loss, diversification is an important component of reaching long-term financial goals while minimising risk.

Before you can set out an asset allocation strategy for your super fund, you need to establish your risk profile. For example, those with a higher tolerance for volatility can invest more of their portfolio in assets, such as shares and property, whereas conservative trustees may be better suited to a higher allocation of income assets like fixed interest and cash.

A person’s risk profile will often change over time, so it is important to review it on a regular basis. Sometimes it may be in a trustee’s best interest to consult a financial professional for help profiling your risk level based on your personal circumstances before deciding on an asset allocation.