- Many super fund members do not select superannuation investment options based on their situation and simply remain in their super fund’s default option.
- Approximately 25% of SMSF assets are in cash and approximately 10% of SMSFs are entirely in cash.
- Procrastination leads to people finding it difficult to review/make superannuation investment decisions.
- Having too much choice can have a demotivating factor, according to Richard Thaler.
- Delegating investment decisions to a professional such as Fortis Financial Planning is one solution and may help your future-self.
Many of us find it hard to make investment decisions in relation to our superannuation. In fact, many of us end up not making any decision at all!
Research has found that many super fund members remain in their super fund’s default option[1] and many never re-balance their investment portfolios[2]. For SMSF’s, ATO statistics (2014-15)[3] show that approximately 25% of SMSF assets are in cash and that approximately 10% of SMSFs are 100% in cash. Could it be the case that these high cash balances are because SMSF trustees are finding it hard to make investment decisions beyond the default cash option?
Why do we find it so hard to review and make investment decisions in relation to our superannuation? One reason may be procrastination. This is the practice of taking on more pleasurable tasks now and putting off impending tasks which are less pleasurable for later.
The Behavioural Economists Thaler and Shefrin proposed that we have two selves[4]. One part of us is known as the “planner” who considers our future-self. The other part of us is known as the “doer” and considers our current-self. There can be internal conflict between the “planner” and the “doer” due to the contrasting time horizons and motivations. There is a bias towards decisions that benefit the current-self as this provides instant gratification. However, this often comes at the expense of our future-self.
Thaler proposed that we can use willpower to overcome this bias to make the right long-term decision. However, exercising willpower often requires a lot of effort and discipline. It is not easy, and comes at a cost. When it comes to superannuation investment decisions the range of investment options can be overwhelming. Many super funds now offer investment options in specific asset classes such as Australian shares or emerging market shares, pre-mixed options such as balanced and growth funds, term deposits and some even allow you to pick your own shares such as BHP or Telstra.
Thaler identified that having too much choice can have a demotivating factor and that as the number of investment option increases the costs of sub-optimal investment choices also increase[5]. With so many choices, what if we pick the wrong investment choice?
This can ultimately lead us to making no choice at all and may explain why so many of us simply stay in the default option even though it may not be the most optimal option.
One solution that Fortis Financial Planning (FP) recommends is to seek advice from a trusted professional. This is an easy way for you to start considering your future-self without having to exercise the will power and effort from doing it yourself.
Fortis FP can help with decisions such as how you should invest your superannuation. We also go beyond this and can help with questions such as ‘’how much should I be putting away for my future-self?’’; and “if my future-self becomes sick or is injured, then what arrangements do I have in place to make sure that I am financially secure?”.
- Choi, J., Laibson, D., Madrian, B., & Metrick, A. 2002. Defined Contribution Pensions: Plan Rules, Participant Choices and the Path of Least Resistance”, Tax Policy and the Economy, Vol. 16.
- Ameriks, J., & Zeldes, S. 2001. How Do Household Portfolio Shares Vary With Age?” Working Paper Columbia University.
- Australian Taxation Office (ATO) SMSF Statistical Overview. Accessed 28 May 2017 https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-superannuation-funds–A-statistical-overview-2014-2015/
- Shefrin, H., & Thaler, R. 1978. An economic theory of self-control, NBER Working Paper 208
- Benartzi, S., & Thaler, R. 2002. How much is investor autonomy worth?’ The Journal of Finance vol LVII, no 4: 1593–1616.
