5 Ways You Can Waste Your Super

5 ways you can waste your super

Unsurprisingly, there are plenty of people out there jostling to help you spend your nest egg. All promise high returns, but not all that many deliver; in fact, you can quickly lose your super if you don’t do your homework.

Take the agribusiness managed investment schemes. Following the GFC, wide-spread drought, and falling commodity prices, these schemes started going into receivership in 2009. They had appealed to investors for their tax deductions if not long-term profitability, but they ended up losing investors and creditors hundreds of millions of dollars.

1) First off, ensuring you have a trusted financial advisor to go through your initial SMSF loan setup is crucial. You can waste a lot of money if you find yourself a financial advisor who charges exorbitant fees, but doesn’t offer great value. Anywhere up to around $xxxx is acceptable for most SMSFs. Beyond that, you want to be sure that you can see the added value of your advisor.

Some advisors may charge a percentage fee. This is a tricky one. My problem with it is that it can lead to your paying too much for advice that you could have received at a much cheaper cost. Consider before you employ this kind of advisor whether 1% of $750,000 of $1million is worth their services, otherwise you’re likely to end up feeling ripped off.

2) Worse than a financial advisor who is overpriced is one who gives you advice not aligned with your desired level of risk.

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In 2014, CBA’s financial planning arms received a lot of bad press after they were accused of putting low-risk investors into high-risk investments. Many of these investors are now pursuing a class action against the bank to the tune of $200 million.

The lesson to be learned is: know your financial planner and make clear your attitude towards risk.

You might be familiar with convertible notes or convertible securities, which offer holders the option to convert their notes into a certain number of shares in a company.

Reverse convertibles are riskier investments where the amount of capital that must be paid back depends upon the performance of an underlying group of shares or assets. Furthermore, it is the issuer of the security that has the option to convert to shares at maturity.

The lure of reverse convertibles is that they offer a higher income stream over the life of the security. The downside is that the issuer can decide to repay the investor a certain number of underlying assets (e.g. shares) if that asset’s price dips below a certain level, leaving you worse off.

Let’s say for instance that the holder of the convertible pays $1000 for a convertible note which has 10 underlying shares and the issuer agrees to repay the full $1000 only if none of the shares fall by more than 25%. If one of the shares over the course of the securities life does fall (let’s say by 30%), then the investor will receive $700 upon maturity.

Essentially, the holder of the security is betting that none of the underlying shares’ values will fall by more than x% while the issuer is betting that it will.

Unless you’re prepared to shed a minimum of the agreed upon percentage of capital, you probably don’t have the stomach for reverse convertibles!

3) Dodgy Property Investments

Property can be an excellent investment for your super (I’ve bet my business and my super on it). Unfortunately, a lot of dodgy salespeople have also seen the value of investing your money in their property schemes. Beware those salesman, wealth “advisors” and other unlicensed individuals who tout the benefits of property and then present you with the perfect development for you to invest in. Just ask yourself: ‘What do they care what property I buy?’

4) Investing in cash and fixed interest

The equivalent of placing your savings under the mattress, this investment choice grew in popularity after the GFC when investors were understandably feeling a bit skittish. Sure, we all know the saying that cash is king, but this kind of thinking is best applied to the short term and therefore not an advisable super strategy. If you’re looking for long-term growth, cash will give you poor ROI. As Robert G Allen put it, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

If you’re wondering how to best invest our super, a initial consultation with your financial advisor will give you a chance to assess the opportunities, set your investment goals, and devise a strategy to achieve them.

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