In super, the tortoise always wins

We all bemoan the state of our super when we open our statements each year particularly given the rolling ongoing crises that beset the share market. Yet the common wisdom is to always look to the long term and eschew focusing on the short term gyrations.

You’ve likely heard that to fund your retirement, your super fund should return inflation plus three per cent. To achieve this, you’ve been told to allocate nearly three quarters of your retirement savings into growth assets, mainly shares, or you will miss out on their growth potential and have your savings eroded by inflation if you let them sit “idle” in cash.

The reality is most super funds cannot achieve this performance nor capture the upside potential – “they’re dreaming” – as Darryl Kerrigan once put it. According to SuperRatings, the average return for the 50 largest “balanced” super funds over the last 5 years is 1% per year. Over a 10 year period it averages 5.1% per year.

Across all types of super funds (except self managed), returns have averaged 3.3% per year – or just 0.3% above inflation. Dreaming indeed. The problem is further compounded because the averages hide the inevitable volatility that comes with “investing” in growth assets.

In Part One I explained a different technique to overcome the dual problem of underperformance and volatility – the barbell portfolio. First, I contended that your super is for saving, not speculating, and should mainly comprise solid investments like bonds, term deposits and annuities.

Secondly, you should still have exposure to growth assets, but you must consider the risk before the potential return as the long term implications can be devastating to your retirement savings.

And as I’ve mentioned previously, both an amateur and professional investor, using a Self-Managed Super Fund (SMSF) can enhance their returns simply through the choices not available to the retail or industry super fund, a classic example is term deposits (although some retail funds are offering this option now).

How did we get here?
An examination of the managed fund industry’s change in asset allocation over time is illustrative. Consider that since 1988 (when earliest data is available), the industry has gone from a 25% exposure to Australian shares to a 43% exposure:

Note that international shares exposure has also grown, from 8% to 22% in 2000, remaining approximately at that level since, as all developed markets remain stuck in an secular bear market, which explains these returns:

Delineating the different investment choices into the traditional “growth”, i.e shares and property, and “defensive” – cash and fixed interest, the structural change in the industry is even more stark:

Interestingly though, defensive assets have outperformed across almost every time period, even during the biggest bull market in history and declining interest and depth in the sector, exarcebated by the paydown of Federal government debt.

Only over a 10 year “average” period can a purely Australian share option outperform its boring brethren, except the drawdown volatility is extreme. Strangely the returns do not match the All Ordinaries Accumulation Index which shows a 9.1% average return (including 4% in dividends) in the same period. That’s a lot lost to management fees!

The Tortoise and the Hare
Here’s an analogy to explain why the downside matters more than the upside.

Imagine two portfolios – the Tortoise and the Hare. The Hare is your typical “balanced” fund, with over 70% assets in shares and property, the rest in cash and fixed interest. Over a thirty year period, the Hare will experience some “fast” years, earning well over 10%, and occasionally will fall into a puddle, earning nothing or losing a few percent. Not so often, by not looking where he is going, he falls into a deep hole, losing 20-40% of the portfolio. He climbs out and sets off again. The Tortoise takes a different path, avoiding the holes and puddles, plodding along, always earning between 4 and 8% year in, year out. But “on average” the Hare should win, right?

The reality is the Hare hasn’t understood time and opportunity cost. To get back to even after a 20% loss – a common occurrence in the last 4 years – requires a 25% positive return. A 40% “once in lifetime” loss requires a 66% positive return. Even if he has successive 10% returns each year, it will take the Hare 8 years in a row to catch up to the Tortoise earning a positive 6% year in, year out. And that’s without falling into any more puddles or holes.

Compare the Funds
So can a barbell portfolio work and why? Let’s compare the typical balanced super fund against an “amateur” and a “professional” barbell portfolio over 10 and 20 year periods.

The amateur portfolio will be constructed in accordance with the typical options available to the industry or retail super fund, with a 90/10 weighting of “investment” and “speculative” assets:

  • 30% cash (represented by 90 day bank bill rate)
  • 60% bonds (representeeed by UBS Bond Index)
  • 10% “Australian shares” index

The professional portfolio will have a greater weighting to the speculative, with a 45/10/45 split between “investment”, “security” and “speculative” assets. (Note, this would normally be called a “conservative” portfolio)

The investments will comprise:

  • 20% in 3 year term deposits (data from RBA)
  • 20% in the UBS Bond Index
  • 5% in high dividend yielding blue chip stocks (ASX50 returns are assumed)

The speculative assets will comprise:

  • 30% in the All Ords
  • 10% in the ASX Small Ords
  • 5% in the S&P500 Index.

I’m using these as proxies against speculative asset picking strategies likely employed by a professional investor. These assumptions also do not include the use of leverage or any market timing and are probably conservative given the Cooper review recently showed how SMSF trustees have provided outsize returns.

Importantly, I’ve assumed an ongoing 1% annual cost in security assets and hedging costs across the entire portfolio, whereby the maximum drawdown is limited to 4% of total capital (more on that strategy later).

Assuming a starting balance of $100,000 over a 10 and 20 year period, the results are as follows:

The potential advantages behind the barbell portfolio are numerous. First, both versions outperform the balanced fund across both timeframes, showing the advantage of absolute vs average returns.

More importantly, the downside volatility is limited, with maximum drawdowns of 2% and 6% for the amateur and professional barbell portfolios respectively, compared to almost 13% for the balanced fund (remember this is an average over a 12 month period. In reality, the typical balance fund dropped over 20% in value during the GFC. Not a good time to retire.)

This absolute return both allows peace of mind for retirees and avoids the “Hare” problem for accumulators.

Finally, the amateur barbell in particular is relatively easy to implement for the average investor and historically has not required any switching or active management. This may change as we move into a secular bear market and stressful macroeconomic conditions, particularly on bonds.

How to do it
The amateur barbell portfolio described above can be easily constructed with the required investment options available within the most popular retail and industry super funds.

Remember the 90% allocation, the vast majority of your fund should be in secure “investment” assets with almost zero potential for drawdown or loss of capital. Most funds have a “cash” option and a “bonds” or “fixed interest” option available. Consider a bias to the latter, e.g up to 60% in bonds, as the top 25 diversified fixed interest funds have returned at least 5% per annum over the last 10 years. Some funds will even have a “term deposit” option, which could return as much as 6% per annum.

The professional investor should consider high dividend paying “Wonderful” listed companies with an excellent track record of earnings reliability and other attributes. However, these stocks cannot be considered “investments” if they cannot be hedged, either through a put option or short Contract for Difference (CFD). As this is available for most stock indices (e.g ASX50, ASX200 etc) a hedged allocation could be used instead of individual stocks, but following the index is assuring mediocrity.

A further enhancement available is the use of corporate bonds, e.g Woolworths Notes and hybrid securities. These can provide better returns than government bonds or term deposits, but have similar risks to equities. As a result, I would preferably like a hedge against any default eventualities and/or not rely on too large or concentrated allocation.

The speculative side of the barbell – no more than 10% for an amateur – would be best allocated to Australian shares only. I would not consider international shares, due to the structural inability of fund managers to provide even a positive return over a 10 year period. A small amount in property or infrastructure – even up to 5% – could be considered due to the income stream, but remember these assets are extremely risky and illiquid.

Professional investors have a completely open world available to them for speculative endeavours, and doesn’t the financial world like to remind you of it? I would suggest someone starting out should slowly increase their allocation to this side of the barbell, once they are aware of the risks and possibilities involved. The key point is you have to consider the chance that you may lose all of your capital speculating, so risk management is vital. This can be done either through physical stop losses (a pre-organised order given to your broker if a share falls a certain percentage or level) or more advanced techniques.

Don’t forget security – the bar that binds the two together. In a non-DIY fund, the best security asset is life and disability insurance where the costs are usually much cheaper due to the group discounts within the fund.

Relying on market volatility and traditional asset allocation to provide the return in your super has been shown as unreliable even in the biggest bull market in history.

Regardless of market conditions, either blue skies or impending doom, and whether you want a hands-off or self managed approach to your super, you need constant positive or “absolute” returns to both build and protect your precious retirement savings.

This is Part Two of a two-part series on the Barbell Portfolio for Superannuation. Part One explained the concept in detail and can be read here: Tackle risk for super returns

Previous articles and Special Reports which explain the background and research behind these concepts are archived under the links “Investing” and “Superannuation

Latest posts by Chris Becker (see all)


  1. But why would you need a SMSF when most of these investment choices are available in low-fee industry funds?

    For example with Australian Super, and you’re feeling lazy, you can just choose the stable option with 56% in cash and fixed interest and only 24% in shares.

    Or something like the Diversified Fixed Interest which has returned 8.49% over the past 3 years.

    If you want to be a more active investor Australian Super lets you choose your own asset allocatio, including term deposits, ETFs, and individual shares in the ASX300:
    AustralianSuper Member Direct

    I haven’t tried this option myself — perhaps the fees would make a SMSF a better option — but it would make a nice transition for those looking to become more pro-active in their superannuation investment decisions.

    • My thoughts exactly – unless you are looking for direct equities – just wear the small fee and get on with it.

      Large balance SMSF’s still have a case against the fees but you still have to put a price on your time.

    • You answered your own question Lorax.

      An amateur portfolio – even for someone with an average SMSF balance (around $900K) can be built using any of the top industry (and retail if you want to pay more for the same) funds as you’ve described.

      The stable option in AusSuper “only 24%” in shares is far too risky – 10% should be the max for passive investing without any hedging available.

      AFAIK, there is no 90/10 “balanced” tailored option out there – but you can create your own very easily.

      The industry is responding rapidly to the rise of the SMSF and offering these alternative products, which is great, because it means the costs are coming down as accountants also compete against the big funds.

      • The stable option in AusSuper “only 24%” in shares is far too risky – 10% should be the max for passive investing without any hedging available.

        I agree, but in the wider investment community 24% share allocation would be considered very conservative.

        Just sayin’

  2. Thinking out aloud here, and maybe this is a silly question about the super industry. Surely there is a preferred optimal allocation in the minds of the fund managers. Yet they offer other products they know to be inferior, because, I can only guess, consumers need choice.

    If a bank offered multiple accounts to customers, say one with a fee of $5 per transaction, and one with no fees, and people kept choosing the $5 fee account due to habit, or simply being misinformed, surely the bank would be deemed to be taking advantage of their information asymmetry. In super the situation is worse because people (especially the young) so rarely actually check the performance of their fund and very rarely compared the performance against other funds.

    So more generally, how informed is your average super ‘consumer’?

    • over 80% of members just go into the default option for whatever fund they are in. The default option is typically your ‘balanced’ portfolio, which is usually 55%+ in equities. This is probably ‘optimal’ from a fee-to-the-fund point of view, rather than from the customers point of view.

      The idea behind the super choice regime was that a ‘free market’ concept would mean that people would become more informed about their super and choose what was best for them. The default options were a kind of catch-all.

      In reality the super industry isnt a ‘free market’ type entity; it is forced savings and it comes out (like tax) without people paying it out of their own pocket. As a result people just arent engaged with their super. So the free market ideal just doesnt work in this situation, and most people are in the ‘default’ option which isnt actually optimal.

      The up coming My Super products are an attempt to fix this; the ‘default’ option will be a low-fee simple super product with some insurance attached. However the details arent finalised yet, so there isnt much way of knowing what the underlying investments will look like.

    • Cam, don’t speak to fund managers privately because you will be shocked.

      Although a rabid few will hold the theological line of CAPM/MPT etc, most I have spoken to do not invest like their funds and have their own optimal portfolio.

      Actually this reminds me of a classic Dilbert cartoon

  3. Great stuff Prince.

    I am skeptical of the aggregate 1% cost for insurance/ hedging. Could it possibly be this cheap? Moreover, should one rather prefer options over CFD’s in hedging your super as there is no uncertainty in terms of placing demands on you intermittent cash flows (margin calls).

    Secondly, I felt somewhere in the article you were trying to get across the point that the relatively better performance in Barbell was somewhat attributable to the historic bull market that has eventuated in bonds. Now from a capital preservation perspective,no argument. But from a return perspective, do the current macro setup conditions of the whole world getting towards ZIRP, make this a somewhat less favorable assumption going forward.

    Lastly, an observation of the performance chart shows the on the upside the green (barbell) and red(balanced) options have a very closely correlated slope (attributable to higher allocation to equities in good times of course). If that is the case, wouldn’t one expect the maximum return observed from barbell to be somewhat less than balanced on account of higher hedging costs and relatively lower allocation to equities. Of course, this whole argument breaks down if the maximum return periods from the two scenarios were observed at contrastingly different times.

    BTW, your analogy of Hare/ tortoise could not be more timely since I am currently onto ‘Fooled by Randomness’. Eliminating tail scenarios (both positive/ negative), can sometimes have marked impact on improving the probability of achieving positive returns.

    Thanks for a very enlightening read!

    • Very good questions.

      1. 1% cost is about right, as you are only limiting your downside on the speccie stuff by 20% – so the OOTM put protection is relatively cheap.

      The cost rises when you want to protect the “investment” side (e.g Wonderful shares), although a more advanced investor could offset this by selling put options (sacrilege I know) to actually buy more Wonderful shares when they drop in price (usually as part of their super contributions cashflow to tactically keep the whole portfolio in balance).

      Also, simple hedging like timing market entry and exit – which I have modelled (and more importantly, use successfully) is much “cheaper” than a direct hedge like options.

      CFD’s are really only for the seriously advanced investor. I use them regularly in my super because our option market is very immature – so for example, I bought some ERA shares on spec, and they collapses – but since I couldn’t buy a put option, I sold a short CFD to cover most of my losses.

      The main difference here, is the US has a very mature option market but they ban CFDS….

      2. Excellent point – I was trying to point out that a barbell portfolio – assumed as HYPER conservative by the industry actually works better in a bull market than a balanced allocation, which requires battalions of brokers, fund managers, salesmen etc to keep running….

      I will be following up with some testing I’ve performed on our the model works during secular bear markets from a capital preservation point of view and of course, the dwindling returns on bonds due to insane ZIRP. This means, by default (sic) that investors need to concentrate on other sources of steady revenue – and for mind, the best ones are high dividend paying stocks of Wonderful and Very Good companies, with small hedges attached.

      But, as I explained in my Great Volatility article, you have to be prepared to suffer 20-50% paper losses without selling during a secular bear market, so this strategy is not for all and may need more effective hedging to keep investors on an even emotional keel.

      3. Yes, the performance of balanced vs pro barbell is correlated, the difference is in the compounding due to limiting the downside – even though the pro barbell has a less weighting (and that weighting is all “dumb” ie I assumed an index following technique, the simplest of all strategies in application and testing).


      • Thanks Prince!

        On first, I will bow my hat to a professional and astute risk managing trader like yourself. It may be the reason that evidence you have found of timing the entry/ exit to be a lot more cost effective than options. For novices and the less educated out there like myself, the sheer weight of active time management and sophistication in TA may tip the balance in favor of option hedging instead of market timing. On hedging the investment side, I agree and would also point out that if not here in AUS, at least overseas, the discount certificates offered by some banks are best friend of a value investor.

        On second, eagerly look forward to if/ when you make the results of some research into this issue of impact on possible dwindling fixed income returns.

      • “CFD’s are really only for the seriously advanced investor”

        Hmmmmmmmm CFD’s for investors?

        “Contracts For Dickheads” is what i call them prince. you give all your money to some unregulated CFD provider who issues you with a meaningless “contract” that would not even stand up on an episode of “judge judy”. Ask the fools with MF gloabl how their CFD accounts are going? people should only use CFDs if they are prepared to lose everything. Not sure how that fits within the definition of an “investor” more like a mug punter.

        apart from that its a good note prince. i think more emphasis should be put on timing though rather than asset allocation. all assets have their time in the sun and their time in the shade and sometimes you just shouldnt be in certain asset classes at all.

        • I really wonder about you GB…

          Did I suggest you put 100% of your super into a CFD account? Did I suggest that the average Jo or Joanne use CFD’s?

          No – this is an advanced strategy for an advanced professional investor (did you read that article at all to get the difference?)

          And when you do use CFD’s for hedging, you only put in up to 5% – because it is a security asset – the bar between the barbell – an insurance cost just like life/TPD.

          Did you read that either?

          As for market timing, I would have thought you reckon its all about the fundamentals -i.e asset allocation and value, or am I misreading those comments too?

  4. This is revolutionary stuff. It could turn the superannuation industry on its head.
    Rumplestatskin queries the knowledge of the super ‘consumer’. Its only a small sample but all my friends who discuss super seem to accept that the ‘balanced’ option is the best choice, especially if they are more than a decade from anticipated retirement.
    That’s not surprising. As you point out it’s the message pushed by the ‘experts’. In fact I can remember reading an article a few years ago stating that SMSF’s did not have enough exposure to ‘growth’ assets(Aussie stocks).
    Of course if everybody switches to the barbell option, finance on the MSM is going to be much less exciting. It could also destroy more employment (stock brokers, wealth managers, gurus) than the carbon and mining taxes combined.

  5. Two questions:

    1) Much of the difference between the balanced and ‘pro’ barbell portfolio seems to be driven by 1 year (2007?) in which the barbells are up and the balanced portfolio falls. Given that the ‘pro’ barbell portfolio is ~50% equities, how did it avoid the 2007 loss, and trend upwards? Is this the hedged equity loss + positive returns on the bond/cash portfolio?

    2) This analysis is not unique in suggesting that a conservative portfolio would have outperformed an equity oriented one over the past 10-12 years (in Australia or abroad) given market meltdowns in 2001, 2008 and this year’s negative result. But is the message here that you should not invest heavily in equities, or that it is not necessarily better to invest heavily in equities? I think the evidence presented supports the latter message, while the text heavily leans towards the former. Is further backtesting referenced elsewhere on the website?

    • More good questions – thanks Arrow.

      1. I’ve answered this partially above, but the main way the pro barbell avoided large losses was though simple hedging to reduce total loss to 20% of the individual weighting in each index category, whilst the positive returns on the bonds and cash helped cushioned as well. The total drawdown was less than 7% as a result.

      2. Yep I’ve said before that I stand on other’s shoulder’s here in terms of methodology and analysis of what historically works (i.e empiricism)

      The message is two fold – investing in equities is speculating. Accept that and decide if you want to speculate with your savings or not. For the majority, they should not – i.e the amateur. For the minority, I am on the active beats passive side of that particular ideological battle.

      It is obvious from the evidence that trusting an allocation towards growth assets to the majority (not all, there are some spectacular ones out there) of fund managers is almost fruitless.

      I have done other backtesting with various weightings amongst the spec/inv side and the one presented is the most optimal from a drawdown perspective, which is the most important. Using leverage, higher hedging (e.g I spend about 2% per annum on hedges in my super) and more active stock picking can boost the returns significantly.

      e.g I average around 12-15% pa in my super – the Barbell-Pro model portfolio averaged 8.9%

      • Prince you may be interested in checking out the new ASGARD Infinity EWRAP, zero fees for holding cash and term deposits. I suspect this is helping Westpac/St George re funding costs. You pay extra for bolting on managed funds and shares etc. They have stripped away all of the volume bonuses etc that were formally paid to advisers etc

  6. SkoptimistMEMBER

    Great stuff.

    Having never used put options before. I assume that they are options that allow you to sell your shares at a fixed price at any time prior to their expiry date, regardless of the market price at the time. Is that right?

    So, for example a put option for Telstra would be something like TLSB38?
    Please excuse my ignorance on this.

    Origin Energy also seem to be offering notes. Mentioned at
    The cons look a bit concerning though.

  7. Lol. Why not just go 100% in ‘safe’ bonds during a global debt crisis and in a period headed towards ZIRP.

    Forget the fact that eventually yields will head the other way and this can lead to a wipe out in nominal terms.

    This is an excercise of cherry picking based on a specific time period.

    In my opinion, this is an absulutlely terrible strategy for the next decade with the ongoing debt ponzi collapse.

    • Cherry picking, seriously? He’s picked the last 20 years, not a random 20 year period in history.

      What would be your suggestion? Help us out here…

      • Curve fitting might be a better description of this this analysis’ shortcomings, impressive as it is.

  8. Prince

    This is good stuff for the majority of the investing public who have been taken to the cleaners and conned by FA in the past. I think the graphs showing the allocation transitions since 1988 is particularly illuminating. The FA con of living longer and therefore higher allocation in equities was a popular theme and analysis naturally excluded timing of retirement issues as many BB have now found out.

    If you have not already seen them CJ has also done some similiar research on the over allocation in super to equities. Articles titled “How should super funds invest’ and “how to cut equities exposure on super” A trawl through his past blogs should locate them and associated articles.

    • Thanks obiwan.

      Indeed I have seen them and had a few small chats with CJ – I agree with him completely about equities, although we differ on how risk is measured and the best way to allocate super. He favours financialised products around residential housing, I favour a more mature debt market, possibly with Research bonds, but definitely more corporate and infrastructure type bonds that can help develop a more robust annuities market place for super investors.

      One thing is clear – secondary asset markets – either the share market (i.e ASX200, not IPO’s/primary market) and houses – are not an optimum place for investment capital.

  9. Jackaon,

    We have had a global bond bull maket over the past 20 years.

    You know the whole GFC issue? What Europe is dealing with? This is about too much debt and bonds are debt.

    The past 20 years have involved the supercharge of debt levels and reducing interest rates. It is not a one way street and the past 20 years will in no way provide direction as to the next 20 years because that would require even lower rates, more debt and for the same problems to continue. Given the fact that it is unsustainable, what happened in the past will not be the same in the future (at least in this current generation).

    As to alternative ideas – I have many, but don’t have time just now as it is a very detailed topic.

  10. Prince, I like your work, but I think there are some dangerous conclusions that can be drawn from your analysis.

    1. Time period: the last ten years basically commenced with some of the highest equity market valuations in history and the global equity market has basically halved twice during the period. This has to be one of the worst periods in which to quantify the success of investing in equities. The last 20 years encapsulates the greates bond bull market in history, with a massive tail wind from large declines in interest rates, back-stopped by ZIRP which has eeked out a few more percentage points of return from already very low yields. The 20 year period captures the equity bull market, for sure, but it also captures its collapse from a valuation bubble and the malaise that followed. Which brings me on to:

    2. Volatility. To conclude that a lower volatility return stream will compound at a higher rate than a higher volatility return stream, the average returns on the low vol portfolio need to be sufficiently high to offset the destructive nature of volatility on the compounded return on the high vol portfolio. I refer back to the relative performance of bonds vs equities (and their respective drivers) over the last ten and 20 years. Setting a strategy which assumes a continuation of returns over the last ten or 20 years (particularly in relation to bonds) is very dangerous. How are bonds going to provide similar returns going forward, based on current yields?

    3. You say there is no element of market timing yet you also say that the ‘risk’ allocation is hedged against a 4% loss. I may stand corrected here but to guarantee a maximum 4% drawdown on this portion of the portfolio would need an (expensive) put or a stop loss at 4%. In the case of a stop loss, there is always the decision when to re-enter the market i.e. an element of market timing. This may be a systematic process, but you don’t provide details in your piece.

    4. International equities. I’m not making any conclusions about the role of international equities (FWIW I currently prefer them to Oz shares due to the AUD outlook and the fact that Oz equities only give you exposure to two risky sectors and effectively eight companies), but for you to draw the conclusion that international shares are a waste of time because most fund managers haven’t managed to post a positive return over the past ten years serves only to highlight that the global equity market has posted dismal ten year returns (refer back to starting valuation and the global debt situation) and that active managers generally aren’t materially differentiated from the index. Saying an asset class has just had one of its worst ever ten periods provides very little information in the way of forward looking investment strategy.

    It’s been said before and I’ll say it again, not everyone can outperform the market. There are only so many premiums out there, and one of them (bonds) has pretty much disappeared over the past two or three decades.

    I’ll close by saying your content is always welcomed and interesting.


    • 1. Thats why I did it over 20 years, I could have done it since 1875 if you wanted to, but I don’t have the corrobarating data to adequately compare super returns. We have only had mandatory super since 1993 or so.

      2. I did not state that this strategy will perform as well in the next 20 years as it did in the last as I don’t have the data…..The macro conditions point to a secular bear market in stocks which – for most countries – an increase in bond prices, and thus reduced yield (look at US, Japan), and a compression in PE ratios, which ipso facto equals higher dividend yields and deflation in prices and wages (except energy and food) Thus, if you can stand the volatility, high dividend yielding stocks will enhance the pathetic yield on bonds. I will address these concerns more fully in a future article – space, time and clarity when trying to outline a strategy has not allowed me to do so!

      I am the last person to accuse that the next 20 years will be like the last, again I’m not sure what some people are reading here…

      3. Yes, using simple hedging tools you can reduce the downside risk of the total portfolio of 4% on an allocation of 10- 20%, by capping losses (using a stop loss, or dynamic hedge e.g OOTM put) at 20% of that allocation. I haven’t provided details as you’ve said, as this would complicate an already complicated and misunderstood strategy.

      4. Bingo. I wrestled with this when I was allocating int’l shares selections into model portfolios as a FP – only a few had the correct Int’l options (BRIC, Asia-ex Japan) available, almost all were allocated to Europe, US and Japan – all in secular bear markets as you’ve said. I have not seen evidence of a structural change here available to the average super fund – some do have the correct int’l options, but these are a minority. That was what I was getting at. As for forward strategy, I contend all developed and EM equity markets will have a dull decade, with high volatility and premium chasing by fundies “hot country of the week”. Again, I stated that this choice is clouded for the amatuer investor who usually, would not have a very good selection. For the pro, there is much more available – ETF’s (incl FX hedged) over almost any int’l market and these should be a part of your portfolio, particularly since the ASX200 has such relative limited upside in the medium (5-10 years), although dividends should be strong.

  11. I’m calling shenanigans. As at May 1992 (the earliest data on my Bloomberg terminal), the S&P ASX200 Accumulation Index stood at 5920 and as at 31 Oct 2011 it was 32430. This represents an increase of 448% at a CAGR of 9.15%.

    You can’t tell me that a portfolio comprised mostly of bonds, fixed interest and cash would have outperformed this over the same period?

    Plus, there was a little thing called the GFC in that period. Time periods in comparative data selection matter.

    • Have you read the article Peter?

      I stated that exact quote – 9.1% return on the All Ords Accumulation Index – vs. the published calculated index returns of the top 25 Australian share index super funds at just under 7% CAGR.

      Should I just remove the GFC from any calculation? Should I start the model at 2004 when the bubble started? Or 1996 after the All Ords recovered from the 1987 (that’s 9 years for those who are counting) regained the nominal high.

      And I have repeatedly shown the APRA and SuperRatings figures that don’t lie – 3.3% annual return from the whole of funds and 6.98% annual returns for Australian share funds over the last 10 years (that includes the GFC).

      There is this thing called slippage, fees, commissions which I have also covered. For a fixed interest investor, these are almost zero, which enhances the returns again. Calculate the compounding affect of 100 basis points in commissions on your super over 20 years and see what happens.

  12. Interesting article as always, Prince. However, I’ll echo Ben’s caveat re the time frame of the analysis. I would add to what he says the reality that nobody puts money into super for only ten years, or even twenty years (except those who are retiring now and did not have super for most of their working lives – realistically these people will be largely relying on government pension). A more realistic time frame would be 30 or 35 years. Over such a time frame a more volatile portfolio would likely perform better.

    The other angle it would be good to examine is the effect of dollar cost averaging on a more volatile portfolio over the accumulation phase. This is one way volatility can actually work for you.

    What I would really like to see is an analysis that uses rolling 35 year investment periods, starting at the beginning of last century and assuming a zero balance to start with and annual contributions of 12% of a salary that starts at 60% of AWE and finishes at 140% of AWE, adjusted to current $. Then average all the 35 year periods to see what the most likely result might be. This analysis would also give you the worst and best likely outcome for a 35 year working life.

    Tell you what, if you can point me in the right direction for data sources, I’ll do it myself. You can have the results to do a post on if you like.

    As a final comment, you noted that it takes 8 years to recoup a 40% loss with 10% returns. But the stock market rarely moves in such a steady manner. More likely that you would get a 30 or 40 per cent rebound at some point within 8 years of a 40% downturn.

    • Alex, I’ve done all the testing over a long time frame (some of which I published here) including the AWE and SGC assumptions. Also DCA, also timing on different time periods and signals…..etc etc etc I have detailed files.

      I started doing this around 4 years ago and the impact of drawdowns on all the permutations and testing is what stunned me – since nobody else was looking at it (AFAIK) and it explained why I had many clients in their 40s and 50’s showing my sh#thouse super statements, saying “but we’ve been contributing for years”.

      Understatement of the week – “the stock market rarely moves in such a steady matter”. That’s the whole problem. Nobody knows what the “average” will be (which is why 99% of all analysts/economists when asked say 10% a year). Adjust your starting point by one year either side of a rebound like that and it makes the difference between holidaying at the Gold Coast or in Italy for your retirement.

      • Thanks for the reply. Sounds like you really have looked at all the angles. I really would like to see that “lifetime of contributions” analysis, as I think it is much more realistic than starting with $100k and having no contributions. I guess the difficulty might be some of the data going back that far, although you could construct an imaginary fund based on the indexes.

        Re the difference between holidaying at the Gold Coast or Italy – don’t I know it. I was lucky enough to retire from the Commonwealth Public Service in 2007, which meant my commonwealth super translated to a very healthy indexed pension. Unfortunately, I also had around $800k in outside super, which was rapidly reduced to around $350k, although it has bounced back somewhat since then. It could have been a lot worse if I’d been born a year later!

      • Prince, thanks for your responses. You make very good points about the lack of international investment options and the erosive impact of costs, commissions, slippage etc. Let’s not also forget that the biggest leakage of all is taxation! The compounding effect of intermediate taxation is enormous. But that’s another topic.

        Too much time is spent on repeating what average returns have been over the past 100 years, and not enough on what is prudent to expect over the next five to ten years.

        Alex, for what it’s worth, a 35 year period will historically pretty much always show outperformance of equities over bonds and cash. On average, the impact of dollar cost averaging surprisingly small in terms of compound rates of return over the long term (however, because it’s the long term, a small compounding difference translates into a very large difference in nominal terminal wealth). Clearly the largest differences in, say, three or five year annualised (compound) returns are demonstrated around periods of high volatility (eg. comparing DCA vs lump sum just prior to vs just after a large market movement).

        None of this changes Prince’s observation that removing enough downside while participating in enough upside will (depending on those ratios to each other and to the returns provided by markets) deliver superior compounded growth rates (ignoring transaction costs and tax liabilities on turnover). However, over the long term whether this is a superior approach will depend on realised market risk premia, cost of insurance, cost of turnover, investor skill or information. Like everything, there will be times when it looks great and times when it looks relatively rubbish. (Was anyone banging on about inflation plus 3% over ten or 20 years in the late nineties?). Time horizon and period of measurement is critical.

    • “A more realistic time frame would be 30 or 35 years. Over such a time frame a more volatile portfolio would likely perform better.”

      Unfortunately this is not the case. The volatility on the downside is the killer, once you go backwards you start chasing your tail, and it’s the same as being at the trots. The 30 or 40% rebound after a 40% loss still doesn’t get you back to where you started.

      People need to start thinking about their final super balance as a range of probable outcomes, with a 25th, 50th and 75th percentile etc. The best and worst outcomes are the outliers, and are the least predictable. You really ought to be aiming for a 25th percentile (or whatever suits) that you can live comfortably with (ie a 75% chance you will end up with more than that amount). If you get the upside, then great, lunch in Venice.

      • “Unfortunately this is not the case. The volatility on the downside is the killer, once you go backwards you start chasing your tail, and it’s the same as being at the trots. The 30 or 40% rebound after a 40% loss still doesn’t get you back to where you started.”

        If this was true, share indexes would never get back to where they started, let alone rise inexorably over the very long term. The reality is that substantial jumps in share prices are much more frequent than substantial falls. As Prince noted, a 40% drop is a once in a lifetime event. A 40% gain is likely to happen several times in a lifetime.

        • We need to be consistent on the time period here, you can’t compare a 40% drop in the space of two months with a 40% rise over a 5 year period.

          When you say ‘more frequent’, what frequency are we talking about? It’s pretty easy to show that over time, all share market indices have become more volatile across all time periods (or frequencies), from sub-minutes to super-annual. This is the rise of the computer algorithm, sniffing out opportunities over multiple parallel timeframes.

          The inexorable rise is helped substantially by the share market “Cliff Clavin” effect, where the duds come off the index to be replaced by the star performers.

          One night at Cheers, Cliff Clavin explained the “Buffalo Theory” to his buddy, Norm.
          “Well ya see, Norm, it’s like this. A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members. In much the same way, the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, as we know, kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine ! That’s why you always feel smarter after a few beers.” — Cliff Clavin

          • “We need to be consistent on the time period here, you can’t compare a 40% drop in the space of two months with a 40% rise over a 5 year period.”

            Agreed. Let’s say annual. I contend that you will find 40% rises in a year at least three times as common as 40% falls in a year.

            Re the Cliff Clavin effect, yes, that is real and hard to account for. Realistically, it can only account for a pretty small portion of the index performance, particularly with a market as concentrated as Australia’s.

          • Further to what I posted earlier – I checked this against the XAO data going back to 1875, and I was right. What was the real eye opener, however, was that there were NO 40% annual rises or falls before 1960.

            Volatility certainly has increased.

          • Using monthly data to 1875, the worst months were:

            11/1987 -32%
            1/1875 -19%
            1/1987 -16%
            1/2008 -15%
            6/1974 -14%

            Interestingly, the best months were mainly in cyclical and secular bear markets…and a long time ago!

            2/1876 24.5%
            1/1930 22%
            9/1875 16%
            1/1980 14%
            3/1921 13%

  13. Prince, I must admit to having one concern about your approach. As I am sure you are well aware, fund managers and financial advisers are all too prone to herd mentality. Whatever is the latest fashion, they will follow it. Usually the latest fashion is what would have done well over the last twenty years (maybe you can see where I am going). My concern is that the approach you are recommending is about to become fashionable.

    • Me too Alex – I’m fairly certain that a return to risk and absolute returns will not occur broadly, but a bubble in bonds and fixed interest is very likely. Look at the recent raisings by Woolies, AFIC, Origin etc and the fact that structurally, managed funds are way overweight equities.

  14. Interesting approach for a set and forget method. I too was concerned about losses (‘drawdowns’) but my approach is different.
    Google “Protecting your super” for the details.
    Basically I stay in shares while they are going up and switch to cash when they are going down or sideways. Back testing shows a 3.4 times increase since in the last 10years.
    Your method returns < 2 times.
    I was also concerned about the 'pain' caused by drops in the share market. So I developed a 'pain' index to help me compare different switching strategies.
    My method is an active one, you need to look at it once a week. But most of the time there is nothing to do.
    I have been using various versions of my method since 2008. Currently at Rev 2.1 and I am very happy with the way it has kept me out of Shares as the fall but put me back in as they rise.

    • It’s not set and forget Matthew – both systems require monitoring, the more conservative a monthly approach, the other weekly or even more so.

      Again, the focus is not on the returns (I used VERY conservative numbers and no leverage and no other timing strategies, including what looks like your very simple moving average crossover strategy) but the downside volatility.

      PS: and if all your posts are going to contain a veiled advertisement for your system they will be marked as spam.

      • As I mentioned above I am very focused on downside volatility.
        One of my main drivers, since we are talking about super here, is that ‘next’ year you can reasonably expect to still have most of your capital.
        I developed (and describe) a ‘pain’ index to let me compare methods. The pain index is based on the principle that there is zero pain if your capital is steady or rising.
        The pain come comes from drops in your capital and the length of time it take to get back to where your were.
        ‘Balanced’ and ‘Share’ super funds have been very painful over the last 3 1/2 years. Ask any retiree.
        I would be interested in a plot of ‘pain’ index of the barbell method you propose.
        I would also interested in how your method would cope with the crash of 1987.

  15. your negativity towards shares is occurring just after an extreme bear market. the long term stats prove that shares greatly outperform bonds. yes they are much more volatile, but superannuation is supposed to be a LONG term investment.