super masters: maximise your financial wellness

With Super Masters, we want to help take our members' super knowledge to the next level. This series will help you explore hot topics in investing, wealth creation and of course, maximising your retirement.

In this edition, we're going to explore these new concepts:

• Dollar-cost averaging
• Hedging

In our previous editions of Super Masters, we looked at the following investment terms:

• Inflation
• Liquidity
• Yield curve

We are also publishing a series on Investment Basics Explained, which is designed to help our members learn investment lingo and understand the basics. Investment Basics Explained covers terms such as Shares, Volatility and Risk vs Return.

But for those who want more, we have Super Masters. Let’s dive in!

Dollar-cost averaging

Dollar-cost averaging is a strategy where an investor contributes toward an investment at intervals over time, instead of committing all their money in one lump sum. This strategy is designed to lower the impact that price volatility may have on investment returns.

Dollar-cost averaging can prevent an investor concentrating their cost base at one point in time of the market cycle. With dollar-cost averaging, an investor gradually invests over time as the market fluctuates in performance.

For many of us, our superannuation is invested using dollar cost averaging. Contributions are made by our employer into our HESTA account over time, and therefore on each occasion, we invest at a new unit price which includes the impact of market fluctuations.

You can also make additional contributions into your HESTA account. These contributions could benefit from compounding and add up to more in retirement. Learn more about contributing to your super today.

Hedging

Hedging is a risk management strategy designed to reduce the impact of volatility in the valuation of assets. Hedging aims to reduce the potential loss from unfavourable movements. However, it can also reduce potential profits.

Hedging can take the form of diversification, whereby investment risk is spread across a variety of asset classes to help reduce the impact of underperformance by any one class.

Hedging can also be used to protect individual assets. For example, the performance of international assets are vulnerable to changes in the value of the Australian dollar. We can utilise currency hedging to lock in the price for a future purchase or sale of currency to reduce the effect of currency price changes on the assets.

Inflation

Inflation represents the increasing costs of goods and services. On a day-to-day basis, we will experience this as an increase in the cost of living, from the food that we buy to the household bills that we pay.

But why does this happen? It can be driven from two angles: increased demand or reduced supply.

When resources are in high demand, some people may be prepared to pay more to ensure they can buy it. A good example of this is property.

Alternatively, when a resource has reduced supply (also known as experiencing scarcity), it pushes prices up. To demonstrate this, think about the prices for petrol at the petrol station; when the supply of petrol is falling, the price goes up. This is because the demand for petrol is the same, but there is less petrol available. 

At HESTA, we continue to invest in a range of assets, including products that are more insulated against inflation risks.

Liquidity

Liquidity represents how easily an asset can be bought and sold.

For example, on the stock market, shares in a big Australian company are generally very liquid and are traded in high volumes every business day.

Alternatively, some assets, such as commercial property, are not frequently traded and are therefore less liquid. As such, if someone was to sell an illiquid asset, they may be required to accept a lower price to realise the transaction.

Investing in illiquid assets can earn HESTA members an extra return, known as an illiquidity premium. However, it’s also important HESTA can meet our cash flow requirements and liabilities, such as income stream payments. Therefore, we incorporate liquidity needs into our investment strategy for each investment option.

Yield curve

The yield curve is a graph that plots the yield (or interest rate) of bonds for different maturities.

Some bonds have a very short time to maturity (e.g. 1 month). Whilst other bonds have a long time to maturity (e.g. 10 years). The yield curve displays the different yield between bonds of short maturity and long maturity.

Typically, the yield curve rises, since investors will demand more yield if they commit to a longer-term bond compared to a shorter-term bond. This is because longer investments require more compensation for the uncertainty around future interest rates and inflation.

A negative yield curve is when the yield on shorter bonds is higher than the yield on longer bonds. This is an uncommon occurrence and may be a sign that investors are more pessimistic about the future.