Share on Facebook Share on Twitter Share on Reddit + - Is super for saving or speculating? By Chris Becker in Superannuationat 7:21 am on April 17, 2012 | 85 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED INISA talks its book on 12% superannuation guaranteeStephen Anthony - chief economist at IndustryA new SMSF property rort emergesEarlier this year, the Council of FinancialPaul Keating's superannuation incoherence deepens Paul Keating continues to spin lies aboutBill Kelty joins compulsory superannuation liarsFormer secretary of the Australian Council of Comments reusachtigeMEMBER April 17, 2012 at 8:28 am Love the billboard! flawse April 17, 2012 at 4:30 pm Absolutely…the billboard says it in a nutshell! Good one 🙂 Lucius April 17, 2012 at 6:27 pm So good Monkey April 17, 2012 at 8:46 am Would be interesting to graph public servants taking lump sum v pensions on retirement. Pfh007MEMBER April 17, 2012 at 8:50 am Good article! That person from Mars is asking an excellent question. The simplest to approach super for the average person who is uninterested in portfolios, asset allocation etc should be a one way savings account. Employer and personal contributions go into the account and interest is paid on the balance. No complex annual reports No fees paid to fund ‘managers’ using the tem generously. People can move their account between financial institutions to chase better rates. The institutions then compete by offering attractives rates which they generate using their expert ability to: Pick good investment opportunities Lend money to people and companies who will repay the loan plus interest Lend money to govts who are not incompetent and will repay without resort to inflation Sure this simple approach will require taking a hedge clipper to the tax regime but that is long over due. The result will be a simple secure super system that the average person can understand. The added bonus is that there may be a new appreciation of the need for stable moderate interest rates – approx 5-6% ( other than when the inflation dragon needs slaying) The Prince April 17, 2012 at 8:56 am I’ve advocated a similar idea. Basically, like a TFN, everyone should get a SUPER account number that you take with you everywhere. ITs the account number you give to your employer, bank, etc. No fuss or dealing with managed funds. From there, we can go back to bankers actually being prudent risk managers, finding investments (other than housing) and matching them to savings through raising of bonds and other securities. Pfh007MEMBER April 17, 2012 at 12:52 pm Yes, that idea is excellent. Of course that immediately rules it out of consideration for Australia! What would all those insiders do if they did not have super fund boards to sit on and clip tickets. Seriously, though it would be quite easy to introduce as an option. Allow the bugs to be ironed out and let people naturally discover it. thomickersMEMBER April 17, 2012 at 8:56 am There is nothing wrong with investing in super. Too many lay people on “balanced” portfolio which is way too aggressive and risky for most people. Another GFC and the balanced portfolio takes a 30-35% hit regardless if your investment manager is warren buffett. below is how a $1 million+ individual invests: http://www.capgemini.com/services-and-solutions/by-industry/financial-services/solutions/wealth/hnwi-asset-allocation/ They typical HNWI is pretty much in a capital stable portfolio, which has been one of the more favourable asset allocations to have after 5 years. flawse April 17, 2012 at 4:34 pm The really big problem is the policy of continuous negative RAT rates over a long period. It is forcing people into more and more risky assets to try to generate any sort of return at all. That’s why Ken Henry is such a fraud berating anyone for investing in equities. he has been one of the big influences for negative RAT rates over a long period. thomickersMEMBER April 17, 2012 at 9:03 pm I would have to disagree that poor RAT is a big problem in saving for retirement. Proper retirement planning is pretty much decided on a sound savings plan and the fate of investment returns only play a small role. If you don’t have enough for retirement it is because you haven’t prepared enough funds or decided to gamble on aggressive asset allocations. Also its very strange to see 60 year olds carrying mortgage debt in the 6 figures (no cashflow to contribute to retirement). Their debt can even exceed their current super balance putting them in “negative financial equity”. Also I think that clients should consider “return of capital” as more important than the “return on capital”. DSILVR April 17, 2012 at 10:44 pm — Also I think that clients should consider “return of capital” as more important than the “return on capital”. — Care to elaborate? JacksonMEMBER April 17, 2012 at 10:59 pm TP wrote about this some time ago, it’s a subtle but important difference. Return of capital (a) is simply when you give someone your money and expect it to be given back – no gain, no loss, just the return of your money. The second, “return on capital”, is that, provided (a) is satisfied, you get paid for the use of your money. Diogenes the CynicMEMBER April 17, 2012 at 9:53 am The issue that the vested interests do not want people talking about is their fees on the various categories – please try for a chart showing that equity fund managed investments have a higher fee attached to them than the other categories. Cannot make too many fund managers billionaires if they can only charge 0.3% on a “cash” fund. Greconomics April 17, 2012 at 1:51 pm Actually, the margins are quite high on cash options within super. It costs approx. 5bps to run a cash option within a super fund. If, you’re paying 0.3%, you’re getting ripped off. You’re also much worse off in the long term as inflation will erode your capital and you’ll end up on the Government’s Age Pension eating cat food (or so Today Tonight says). Diogenes the CynicMEMBER April 17, 2012 at 6:38 pm Ouch. As a SMSF since 2000 I had no idea it was that high. Outrageous. My total yearly costs are 0.14% p.a. and that includes the outrageous $180 fee for funding some enormous bureaucracy somewhere. Greconomics April 17, 2012 at 9:42 pm You must do most of the work yourself. Definitely a great way to save $$$. Unfortunately, most people aren’t financially literate or administratively capable enough to run their own SMSF so for them, superannuation institutions are still the best option (despite what their accountant may tell them). Unless you have an accounting degree and a very simple investment strategy like cash or TDs, running your own SMSF without any professional help can be quite time consuming. Personally, I prefer to pay a bit to the professionals and spend more of my time with family and friends. fewlishMEMBER April 18, 2012 at 8:58 am Agreed. One of the (sole) purposes of super it seems is to legislate retirement monies for joe public as it appears he cannot do it himself. I have always seen SMSF as somewhat of an exemption of this rule for the more financially literate. The key here is ones opinion of themselves as literate. The unfortunate element up until now has been the subterfuge surrounding fees and commissions joe has been subjected to along the way. This new legislation will do a lot for the newer generations but it remains to be seen what will be done with all the ‘grandfathered’ near-retirees accounts. Jack April 17, 2012 at 10:06 am A couple of points, the whole purpose of super is to save for retirement. The original balanced option up to about 2003 was a 50% split between growth and defensive split. The plethora of funds that crept in and with the focus on short term performance measures and terms like balanced growth etc meant that by the GFC the word balanced meant 70% growth assets. The other issue was the wealth industry gets paid by FUA so at all levels there was this push to increase the value of the assets held. The concept of super is good, it just that the ongoing implementation has been bastardised. I posted last week about a local financial services firm that has its inhouse mortgage broker, accountant, financial planner, that is tranfering funds from industry funds (auscoal etc) to SMSF, gearing them and purchasing investment property in the Bowen Basin in QLD). Also I have seen the issue with Tri Capital and SMSF mums and dads not being able to avail themselves of Paul Keating’s safty net that he put in place for public retail funds. thomickersMEMBER April 17, 2012 at 10:21 am If that firm has its own risk management system (business side), they will understand that there is a chance that they will walk over a cliff if something goes wrong with Bowen Basin. If a financial services firm has its own business risk management system in place they will realise that it pays off to diversify client funds. Jack April 17, 2012 at 10:35 am Unfortunatly what i can gather the risk management is that all of the sub entities are are separate businesses, so if something goes wrong ie the accountant gets sued and put out of business, the mortage broker and financial planner are separate from the process even though they are still profiting from the overall strategy that is being recommended. thomickersMEMBER April 17, 2012 at 11:08 am I would say that the real ramifications of Bowen Basin losing 30% in price would be that SMSF clients will be in negative equity and could default/walk away from their loan. -The mortgage broker would lose the ongoing trail on the loan -The financial planner will lose the client + any investment service/trail fee due to Funds under management going to $0 or client leaving. -The accountant loses the SMSF administration fee. And this is a scenario without taking into account breaches of the corporations act/ ASIC guidelines. This is capitalism working. 8millMEMBER April 17, 2012 at 6:30 pm Sounds like a bunch of scum bags, I wonder if hey disclose all the fees and cgt’s they make on the property development side they are likely recommending? Seriously, this is wrong and should be outlawed that such inter twined related businesses must disclose all benefits or be sued off the face of he earth JacksonMEMBER April 17, 2012 at 9:04 pm +1 thomickersMEMBER April 17, 2012 at 9:19 pm 8mill you are correct in being highly angered. but i believe it will only stop once the true force of economic reality plays reveals its cards. GFC exposed Storm Financial levering clients 3-6x into shares is not good business (ironically the business when down first before clients received their final margin call). GFC2 will reveal that levering retirement wealth into property is equally bad business. Moral of the story: do not lever your wealth by multiples of 3-5x. Marcomarco April 17, 2012 at 10:13 am Super is just another tax to me. Yes it’s money I get back but very similar to gov’t in terms of paying % of my wealth to people who don’t know me and then having a promise to be taken care of later. Since I don’t trust any of the funds nor their fees I just choose to treat it like a savings account and park it in 100% cash. Sounds bad but I’m not going to trust people with my money to invest it while fund managers and corporate directors, CEO’s etc get the easy life. Either way (cash or shares) you’re just pumping your earnings-the result of your labour and time- into other peoples’ pockets with a future promise. thomickersMEMBER April 17, 2012 at 10:33 am by sitting in a cash fund, you are making it even easier for the corporate to have the good life. Cash funds get loaned out at 2-3% more than what they pay you in interest. So IMO, The cash fund has an underlying MER (mangement expense ratio) of at least 2%. Jack April 17, 2012 at 10:38 am Actually because of the hunt for funds to lend out to property, institutions like Colonial and ASGARD now have nil fees for cash and term deposits. ASGARD infinity is an example. “This is not a recommendation” – standard disclaimer. thomickersMEMBER April 17, 2012 at 10:45 am Even if there is no direct MER charged, there is still a spread between what you receive and what they lend out for its over 2% for a cash fund. Term Deposits however reduce this spread to around 1%. If an index manage fund for example charges 0.50%-0.75%pa that is all they receive to run the whole show. 8millMEMBER April 17, 2012 at 6:33 pm Scum bags, l wonder if all the fools buying into these funds realize how they actually work? bv2726MEMBER April 17, 2012 at 4:53 pm Why not have your 100% of super money in an SMSF in a bank account or term deposit? (Perfectly legal if thats your investment strategy). You can google places that charge low SMSF yearly fees…and park the money in a term deposit or bank account of your choice, earning whatever interest it earns. And then there is no MER to worry about and at least your super fund cannot lend it out an make more money off you… Pfh007MEMBER April 17, 2012 at 6:06 pm Agree with that but that is still an unnecessary hassle for most people. Something simple along the lines of TP’s suggestion would achieve the same and could easily be the default option. BenMEMBER April 17, 2012 at 9:55 pm Wow. I don’t mean to offend, but this is an ignorant viewpoint. Tax is not your money – super is. By taking no interest in your retirement investments because you don’t trust fund managers or CEOs is cutting off your nose to spite your face. It would be in your own interest to educate yourself about the alternatives. Marcomarco April 17, 2012 at 10:14 am “One of the deepest thinkers on Complexity Theory is Joseph A. Tainter, the author of The Collapse of Complex Societies . Rickards devotes a considerable amount of space in Currency Wars explaining Tainter’s work, which is crucial to understanding why it seems modern society continues to face ever-more frequent financial crises, wars, currency collapses and societal breakdowns. Tainter, who studied societal collapses throughout history — from the collapse of the Roman Empire to the disappearance of Mayan and Chacoan civilizations — argues persuasively that in all cases, societal breakdown follows a fairly consistent trajectory: The exponential increase in complexity, which eventually reaches a point of diminishing marginal returns followed by collapse. In other words, a society’s inputs increase with the scale of civilization, but its outputs – when measured in terms of public good – eventually decline per unit of input until the whole shebang implodes and the societal growth process starts over. Take the case of government bureaucracy. In America’s early beginnings, our government was highly efficient and generated substantial “public goods”. We had a straightforward and simple blueprint that enumerated citizens’ rights and responsibilities (the Constitution and Bill of Rights), and the rules of the road for how society would be governed. Over the course of the next couple of hundred years, complexity inexorably worked its way into the bureaucratic system. To understand the perils of complexity, one need only look at the nation’s tax code. In 1913, when the 16th amendment was ratified allowing the Feds to tax individual income, the tax code was 400 pages. One hundred years later, our tax code is over 72,000 pages. Today, the marginal returns of taxpayer (ahem) “investments” in government bureaucratic functions – education, financial regulation, agriculture, labor, and others — are diminishing at a faster and faster clip, the downslope of the marginal utility curve. There are more and more inputs (rules, regulations, laws, etc.), but the outputs — or the public goods from those inputs — are fewer and fewer. The Dodd-Frank financial overhaul legislation is another great example of diminishing marginal returns in action. The 849-page Dodd-Frank bill (compare that to the 37-page Glass-Steagall Act that regulated Wall Street until 1999) provides absolutely no clarity whatsoever in how the financial sector should be regulated. It’s a mish-mash of confusing gobbledygook, ill-defined, and vague government overreach that only a Wall Street banker could love. Why? Because only they have the size and scope to pay astronomically high-priced lawyers to comb through the legislation and find the myriad loopholes and exemptions that will render future enforcement of Wall Street scumbaggery toothless. The consequence of Dodd-Frank then is more, not less, complexity, which creates more instability in the financial system as the next financial weapon of mass destruction lurks right around the corner. Rickards uses Tainter’s example of the collapse of the Roman Empire to explain just what happens when complex societal systems go kaboom: “When the barbarians finally overran the Roman Empire, they did not encounter resistance from the farmers; instead they were met with open arms. The farmers had suffered for centuries from Roman policies of debased currency and heavy taxation [to fund an increasingly complex bureaucracy] with little in return. In fact, because the barbarians were operating at a considerably less complex level than the Roman Empire, they were able to offer farmers basic protections at a very low cost.” In Tainter’s and Rickards’ view, increasing complexity also creates hugely inefficient obstacles to improvements that would benefit all of society, and instead benefits only those parasitical government and financial elites who use complexity to perpetuate their own privileged class through rent-seeking — the accumulation of wealth through non-productive means. Marcomarco April 17, 2012 at 10:15 am I have to requote that one- it’s a nugget: n Tainter’s and Rickards’ view, increasing complexity also creates hugely inefficient obstacles to improvements that would benefit all of society, and instead benefits only those parasitical government and financial elites who use complexity to perpetuate their own privileged class through rent-seeking — the accumulation of wealth through non-productive means. DSILVR April 17, 2012 at 11:09 am As always, excellent read. I’ve been scouting your Super posts from the very beginning and am eagerly awaiting a post on SMSF for Gen X/Y which you said you’d post some time ago. Because I’m not as financially literate as most here, I do apologise if my posts are not very constructive. All I can merely do is praise and soak up as much as possible. Thank you again. georgie April 17, 2012 at 11:24 am Its not worth it, a couple of thousand to establish and atleast $1000 in fee’s annual to maintain. There must be an established number where it is profitbale to start a self managed super fund but if its $50,000, $100,000 OR $300,000 i don’t know. DSILVR April 17, 2012 at 11:31 am Of course, this was previously discussed. A weighing up of current fund fee’s VS audit fee etc etc. Then there is the returns. Obviously a lot to weigh up. Have a look at “A super question (updated)” on Jun 10th, 2011. The Prince April 17, 2012 at 11:31 am Ah I very stongly disagree georgie. It can cost anywhere between $0 – esuperfund do it for free usually – and around $400 to set up – add another $600 if you go for a corporate trustee (which you don’t really need, IMO, for awhile at least if you are Gen X) I pay $850 a year – $150 to ATO and $700 to esuperfund and I started with $15,000 – then just over $100,000 when I rolled over and combined my wifes super as well as my other ones (except Military Super – cant get access to that until I’m 60!!! unreal, and there performance is shockingly bad). Ive more than doubled it since the GFC, so the fees are going down as proportion very fast indeed. I reckon $50,000 is minimum IF – and big IF, your salary is in the $80K plus range (since the contributions after a few years will get you to $100K anyway), or $100K if you are on the average wage. $200K/$300K minimum balance is a furphy designed by accountants who should know better, although the caveat is, if you are only buying shares through an electronic broker or using term deposits/cash accounts, this makes auditing/accounting very easy. Even a work experience accountant can do it. There are non-SMSF type structures you can use – like just choosing the right asset allocation within your industry super fund, until your balance or time available (I posit the latter is more important). Rightio. I need to write this post stat. NB: I do not receive any benefit from esuperfund, they just happen to be the one I’ve used. Do your own research. georgie April 17, 2012 at 12:01 pm Guess I need to do a little better research on what funds are out there. Thanks Prince [email protected] April 17, 2012 at 1:51 pm TP has done you no end of good just now Georgie. Times have changed, no? It was ridiculously expensive when I started. You don’t have that expense now. AB April 17, 2012 at 2:29 pm “There are non-SMSF type structures you can use – like just choosing the right asset allocation within your industry super fund, until your balance or time available (I posit the latter is more important).” My superannuation is managed through a Macquarie Wrap to give me access to DFA funds. (The wrap is the cheapest way for me to access the funds – thanks to my independent, unaligned, commission-refunding financial advisor for doing that research so I didn’t have to.) As someone who’s happy to be an index hugger and who chooses those indexes and the allocations themselves, I can’t see any advantage to an SMSF. Am I missing something or is that a common view? The Prince April 17, 2012 at 2:33 pm AB that’s the other solution I was referring to, but its certainly not a common view. In fact, for most, particularly those with smaller balances, its the better option outright than a SMSF. I could do 80% of what I do in my SMSF in a retail wrap (I used to use Asgard quite a lot, not bad from memory), but I also trade and hedge a bit using CFD’s and options. thomickersMEMBER April 17, 2012 at 2:42 pm SMSFs require a more work on the client side. It may be cheaper on a $200,000+ balance but the act of being the trustee to yourself is serious stuff. its industry knowledge that 1 in 5 SMSFs are “non-compliant” and the if ATO wields its axe, lots of penalties in place. (eg make the whole fund taxable at 46.5%) The increased SMSF uptake is a bit of a fad IMO. I expect lots of SMSFs without an appropriate investment strategy to perform poorly especially if they hold 1 asset (gearing into property). AB April 17, 2012 at 3:43 pm Thanks guys, that fits with my thinking. My balance is six figures but well towards the lower part of the range. I’d have no problem with setting up an SMSF if I thought if offered any advantages but my investment philosophy is pretty simple. Low cost diversified indexes and a lot more fixed income than typical super portfolios. As an aside, I was surprised to find that Macquarie was the cheapest way for me to access DFA funds having previously only viewed it as a Millionaires’ Factory. energywonk April 17, 2012 at 6:11 pm bang on prince. im with esuper too. great so far. based on the 1% fee rule i reckon 60k is needed. but your call of 50k is near enough. The Prince April 17, 2012 at 11:27 am Thanks DSILVR Apologies, I want to get around to posting on SMSF or SMSF-like structures for Gen X/Y, but I’m busier than a one-armed bricklayer in Kabul – I’ll circle it on my list of requests. energywonk April 17, 2012 at 6:18 pm hahaha. i have never heard this googled it and its everywhere. LOL thomickersMEMBER April 17, 2012 at 9:36 pm The Prince, I also look forward to seeing more super related posts. But I would highly suggest you also present the case against owning SMSFs for Gen X/Y. (ie being capable of acting as trustee to yourself and meeting the “sole purpose test”). My opinion is that only a minority of the population can handle this responsibility whilst balancing work/family/recreation. Serious stuff. georgie April 17, 2012 at 11:20 am 43% of super is stuck in Australian Shares…. Super is worth 1.3 trillion, 2/3 is in non self managed super funds, so 43% is invested in equities meaning, $370 Billion of our funds is invested in equities. $370 Billion / 1.2 Billion Equities markets = 30% Our super funds not including self managed have 30% of the market capitalisation of the ASX. I assume that all these funds work on the same principles/metrics to buy and sell asx equities. Won’t this lead to big swings in the market as these funds will generally buy and sell in synchronisation?? Does it not represent a slight form of a ponzi scheme where the constant flow of money from younger people’s contributions pays out retiree’s cashing out of the system as the contributions from non retiree’s keep stock prices inflated due to the sheer size of super funds as they just flood the market with capital? Anyways, just some thoughts. [email protected] April 17, 2012 at 11:42 am Ponzi ish for sure. It is why Prince taking charge of his own is such a necessity . We all must consider this. energywonk April 17, 2012 at 6:21 pm absolutely anyone with half brain should consider this. no tricks or secrets. lots of cash with good returns >5.2%, nice stable equities concentration = supermarkets, utilities, a little gold maybe and just sit back and watch the volatility go down and the returns grow. i recommend it to anyone prepared to spend a few hours a week reading fine blogs like this. PhilH April 17, 2012 at 1:14 pm “Won’t this lead to big swings in the market as these funds will generally buy and sell in synchronisation?” Unlikely; the bulk of fund holdings aren’t actively traded. Trading costs money and attracts CGT, which puts their costs up and reduces their returns. Easier (and smarter) to buy and hold. The big trades that do occur usually happen off-market, anyway. theponz April 17, 2012 at 11:38 am Is the issue that we should be afraid of volatility, or more that we should attempt to time volatility better in our investments ? I would say that slavish devotion to shares, as you call it, is behavior symptomatic of our entire economic & social structure. A lack of volatility in super (as in life) carries its own risks and opportunity costs, and is probably an illusory state of existence to begin with. I’m not sure I agree with your notion that growth assets (equity) rely upon volatility to make a return. If anything, they rely upon a properly functioning economic system to make a return. The volatility is no more than an observable display of investors’ behavior – it doesn’t necessarily reflect the actual risk attached to the return on capital. Volatility can in fact be a misleading indicator of the inherent risk involved in an investment. A private/direct equity or other form of unlisted investment, which is equally attempting to capture a risk premium inherent in owning equity, is not of itself less risky because it is not marked to market on a continual basis. As for the upside being clipped by hedging on the downside, I would say that was the set-up most large endowment and pension funds thought they had in place within their risk allocations prior to 2007. There were not many that anticipated the change in correlations between asset classes and strategies which rendered those ‘hedges’ ineffective, but in a sense, how could you, from an institutional point of view, buy insurance against the system collapsing ? In a period like 2007/08, there was not much hiding from the final reveal of systematic risk which shocked nearly all asset classes, unless you were actually short the ‘system’ itself, and investing long in volatility. That said, I think a 24 year old should be willing to take risks with the capital available to them as compulsory savings – the elevated volatility that may arise from equity investments that don’t need to be liquidated for 30-40 years is just noise. To make a philosophical decision in the year 2012 to substantially reduce exposure to equities at an early stage of an income earner’s life to me is predicated on the belief that there will be no risk premium available from owning equity in businesses over the next 40 years. That is a big call to make, and if it’s true, then actually having a job to begin with is going to be a bigger issue than worrying about retirement. AB April 17, 2012 at 3:52 pm “To make a philosophical decision in the year 2012 to substantially reduce exposure to equities at an early stage of an income earner’s life to me is predicated on the belief that there will be no risk premium available from owning equity in businesses over the next 40 years.” I have a different philosophy as someone who has a large part of my superannuation in fixed interest. I’m more interested in avoiding losses than I am in maximising my earnings. One of Harry Browne’s investment principles sums it up for me: http://crawlingroad.com/blog/2008/12/17/the-permanent-portfolio-and-the-16-golden-rules-of-financial-safety/ “Rule #1: Your career provides your wealth. You most likely will make far more money from your business or profession than from your investments. Only very rarely does someone make a large fortune from investments. Your investments can make your future more secure and your retirement more prosperous. But they can’t take you from rags to riches. So don’t take risks with complicated schemes in the hope of multiplying your capital quickly. Your investment plan should be aimed, first and foremost, at preserving what you have—preserving it from investment loss, government intervention, or mismanagement.” JacksonMEMBER April 17, 2012 at 5:17 pm AB – “I’m more interested in avoiding losses” TP – “which means obtaining constant positive returns, …, but aiming to never make a loss” I can’t state how massively important this is. A 5% loss needs more than a 5% gain to get back to where you started. It’s year 8 mathematics but most pundits just don’t get it. The Prince April 17, 2012 at 7:17 pm And not just the immediate gain, but the opportunity cost of that permanent loss compounded over say 20 or 30 years. Which is why the 30 year old accumulator and the 55 year old soon-to-retiree need very similar, if not same asset allocation and hedging/risk management strategies. theponz April 17, 2012 at 8:41 pm If your view is that there is no premium to be earned for taking risk over the next three to four decades, then maybe a 30 and 55 year old should be allocating risk in their portfolios in a similar fashion. Otherwise, a 30 year old clearly has a much greater propensity to take risk and recover from drawdowns (assuming they can stomach the volatility). I agree that risk management is fundamental, but an intelligent risk allocation and investment strategy does not necessarily have to preclude large exposures to risk premiums. I’m sure it’s not news to you that some very successful investors have experienced large drawdowns which they have amply recovered, despite the weight of negative compounding. Macdaddy April 17, 2012 at 11:41 am Koehler’s ABC business panel suggested an affective way to help the government get back into surplus without disrupting aggregate demand was dipping into super funds. Highly unlikely but highlights super funds can be tampered by governments…nothing is sacred except megabank poid April 17, 2012 at 12:59 pm Dont be surprised if super funds are tapped for infrastructure investment in the future. PhilH April 17, 2012 at 1:18 pm *sigh* Yes, the government are coming after your money. Make sure you add an extra layer of foil to your hat. While you’re at it, read section 51(xxxi) of the constitution. Monkey April 17, 2012 at 7:24 pm And once you’ve read it and read the relevant case law (and considered the response of the High Court in the current tobacco litigation), then come back to me and explain what is to stop the government doing things like: increasing the retirement age; changing when and how much of your super you can withdraw; allowing or compelling investment of super funds in a particular asset class; or any number of other regulatory changes related to super. Yes, the government cannot seize your super outright, but they could compel superannuation funds to hold a percentage of assets in ‘infrastructure bonds’. Politics is what stops them, not the law. Greconomics April 17, 2012 at 10:04 pm Yes, you’re absolutely correct Monkey. There is no Bill of Rights in the Australian constitution so the Australian Government could also make all men wear red hats, abolish all verbal communication and imprison anyone who eats cabbage. I’m cashing out my super, converting it to gold bullion and burying it until world war three ends. Then, I’ll enjoy my retirement on the sunny island of Mt Everest (which will be one of the few land masses left in 5 years due to global warming). 3d1k April 17, 2012 at 10:10 pm Lol. Monkey April 18, 2012 at 6:52 am Thanks Greco. You are actually completely wrong, since the High Court has read an implied right into the Constitution, which protects free speech (verbal communication included). I am not arguing that the Government will tamper with superannuation. But, all too often people refer to the ‘just terms’ provision in the Constitution with little to go on other than The Castle. It’s rather more complicated than that, I’m afraid. But, if you read my earlier post, I wrote that it is politics that stops the Government tampering with superannuation. We live in a civilised society. coastybloke April 17, 2012 at 12:57 pm Super is a scam. While the great bull market was on from 1982 to 2006, a drover’s dog could be a fund manager. Park your clents’ cash in Australian blue chips, some property, overseas shares ( a great bet when the AUD was in the toilet) some cash and a bit of fixed interest. Collect your nice fat fee and spend the rest of the week on the golf course. Bit different now though, and we see that fund managers are generally sheep, haven’t an original idea in their collective heads, and persist in obsessing about Australian shares. Nett results are paltry as this blog illustrates – and yes, the only way to turn a buck is to speculate. Smart people either opt for cash in their super funds or get out altogether when they can. Rusty Penny April 17, 2012 at 2:05 pm Why do you equate Super to the performance of Blue Chip ASX equities? ‘Super’ is a quarantined trust, nothing more. An investment vehicle is not asset selection. persnickety April 17, 2012 at 2:04 pm Hmm, I have worked in super for the last decade or so. An SMSF is a good idea IF you have enough of a balance to start with and if you are willing to spend time on it. If you just want to set and forget- better off in an APRA regulated fund. It always used to amaze me how people would moan about the fees, but then take their money and invest in very similar share portfolios in their SMSF- they ended up paying more in accountant and investment broker fees than they would in the fund. On the Trio issue- at least if you are in an APRA regulated fund and the fund falls over, the government will give you money back (at the expense of the rest of us) SMSFs have no chance. A form of deposit insurance for members of an APRA regulated fund. I don’t ave an SMSF because I really don’t want to spend my free time learning all of the SMSF rules- I spend enough time having to deal with the arbitrary communications of the ATO at work. But I at least have a reasonable idea of which funds are value for money in the marketplace and which Trustees are competent and not being paid excessivly high fees- because I deal with them. Infrastructure- the government has already tried to encourage funds to invest- the main response by the funds wsa to point out that the primary obligation under super law is to maximise the retirement benefit of the member, and infrastructure projects were unlikely to do that, so they declined to participate (in the ones government wanted them too- several funds have invested in infrastructure here and abroad that provides the returns they needed). energywonk April 17, 2012 at 6:15 pm im fascinated you dont have SMSF yet work in super industry. Greconomics April 17, 2012 at 10:09 pm Actually, the returns over the long term are relatively good. The reason most super funds don’t invest in unlisted infrastructure is because the asset class is inherently illiquid. APRA is quite hawkish on illiquid assets and so most super funds either avoid illiquid investments like unlisted infrastructure entirely or have only a relatively small allocation (less than 5%). Jack April 17, 2012 at 3:41 pm I have always thought from a political perspective that the far right of the Liberal party believed super should be only allowed for the priveleged, ie the way it was pre 83 and that the far left of the labor party believed that money should be used for social purposes. Paul Keatings belief was that super should be the pool of savings that offsets our CAD and so Australia would not be reliant on overseas borrowings. It would be interesting to see what would have happened if super coverage had remained at about 40% of the workforce which is what it was prior to the intro of the SGC. 8millMEMBER April 17, 2012 at 8:37 pm I love these so called experts shting themselves re equities 5 yrs too late. Sucking people now to move into fixed interest is as silly as it was buying equities in 07. It’s a hard gig equities but I just don’t think you can accumulate enough Money in fixed interest over a lifetime? Everyone who has ever done well has taken on risk, not avoided it. aj. April 17, 2012 at 11:43 pm Maybe – but aussie bonds (fi) is looking pretty good this year so anyone that took that advice has prob been fleeced by their corporate retail fee machine. And Perhaps advice on being cautious is looking reasonable in light of the rolling euro slow motion train wreck. Bulls and bears sigh … They just don’t get on. It’s not really that post GFC people are being too cautious its more that post GFC the hazy trance the super funds had managed to lure the disinterested or naive into has been snapped away. AB April 18, 2012 at 9:01 am “It’s a hard gig equities but I just don’t think you can accumulate enough Money in fixed interest over a lifetime?” Well possibly. But just look at what the Japanese stockmarket has returned over the last 20 years if you want to see what protracted deflation can do to equity returns. Sure interest rates there are close to zero, but deflation means that your money is become worth more each day (and you don’t pay tax on that gain). DSILVR April 17, 2012 at 11:09 pm AB Quote – “My superannuation is managed through a Macquarie Wrap to give me access to DFA funds. (The wrap is the cheapest way for me to access the funds – thanks to my independent, unaligned, commission-refunding financial advisor for doing that research so I didn’t have to.) As someone who’s happy to be an index hugger and who chooses those indexes and the allocations themselves, I can’t see any advantage to an SMSF. Am I missing something or is that a common view?” The Prince Quote – “AB that’s the other solution I was referring to, but its certainly not a common view. In fact, for most, particularly those with smaller balances, its the better option outright than a SMSF. I could do 80% of what I do in my SMSF in a retail wrap (I used to use Asgard quite a lot, not bad from memory), but I also trade and hedge a bit using CFD’s and options.” I’m a little behind the 8ball here… AB are you stating that you simply track the performance of each available investment choice within your Super Fund and change according to performance, thus maximising capital? If so, Prince… Isn’t this what you said you do with your Mothers Super Fund? Forgive me, I recall you saying that some time ago. Ha! Could more be written on this? Thanks heaps. 8mill Quote – “I love these so called experts shting themselves re equities 5 yrs too late. Sucking people now to move into fixed interest is as silly as it was buying equities in 07. It’s a hard gig equities but I just don’t think you can accumulate enough Money in fixed interest over a lifetime? Everyone who has ever done well has taken on risk, not avoided it.” Indeed, however, never underestimate the power of compounding. AB April 18, 2012 at 8:59 am “AB are you stating that you simply track the performance of each available investment choice within your Super Fund and change according to performance, thus maximising capital?” I don’t think that’s what I’m stating (I didn’t quite understand the question). I simply invest in the appropriate DFA index funds according to my chosen asset allocation and rebalance the allocations on a six monthly or annual basis when required (Macquarie can do this automatically). Unfortunately I don’t think Macquarie is smart enough to automatically redirect new payments to any assets that are below their target allocation (as I do with my non-superannuation investments in order to reduce tax liabilities). e.g. Let’s say I decide on 50/50 growth versus defensive assets and within that: – 20% Australian shares – 15% International shares – 10% Property – 5% Emerging market shares – 30% Australian bonds – 15% International bonds – 5% Australian cash Each time my employer makes a superannuation payment, Macquarie automatically makes the payment to the chosen funds based on the allocation above. The wrap is simply the cheapest and easiest way to access multiple DFA funds that are normally only available with much larger investments than mine. JunkyardMEMBER April 17, 2012 at 11:20 pm Thanks for the interesting post and comments. What effect will the increase in super contributions to 12% have? Apart from their goal of giving people more to retire on. I notice many funds totally salivating over this increase, which has me a little skeptical. I can only see this putting more pressure on low paid workers in small business, as some of their natural wage growth is eaten by the super increase. thomickersMEMBER April 17, 2012 at 11:37 pm the additional SGC will either come from the following: -your own take home pay (no net benefit to you) -taxing more on mining equities (increases your contributions, but reduces the miner’s funds for reinvestment/expansion, which leads to lower long-term expected returns, which leads to lower growth in super). This has no net benefit also. aj. April 17, 2012 at 11:50 pm I’m not certain on this but it would seem that super provides no scope to carry forward losses either (ie taxed on gains and realized losses lost)? If that’s the case that would lean super further to a a saving vehicle. If you want to take risks do it in a vehicle that lets you use the losses and franking credits. Jack April 18, 2012 at 8:57 am Just in regard to equities and bonds. Super pays tax at 15% on earnings, having fully franked divendends allows the tax to be offset. Re Bonds, given the 10yr rate for the Aust Gov bond is about 3.9% and the fact that 75% of the purchasers are foreign, I would be suitably cautious on reweighting now into bonds. Also gains can be offset with losses within the super as well you can transfer the gains into an Allocated Pension with no CGT. It is a good tax vehicle, the real issues are having the underlying asset allocation dynamic and keeping costs down. I personally have stayed away from SMSF and use wraps given that allow direct share investment and its consolidated reporting. I also haven’t succumbed to idea of borrowing within my super except for the odd time of using geared share funds. AB April 18, 2012 at 9:02 am “I personally have stayed away from SMSF and use wraps given that allow direct share investment and its consolidated reporting. ” Similar to what I do except I use the wrap to get access to wholesale funds and their associated pricing. thomickersMEMBER April 18, 2012 at 9:23 am +1 to wholesale funds aj. April 18, 2012 at 1:09 pm Offset losses and gains in a year but not from year to year? What happens to excess franking credits? aj. April 18, 2012 at 1:30 pm Also remember the interest return is not the only way you get value from a bond… Have a look at Aussie FI ytd (not that this will necessarily repeat). Jack April 18, 2012 at 2:15 pm That what I mean re bond yields at 3.9%, say we get a bit of a sell off on 10 yr bonds and in 12 months the yield is back over 5%. There is a 5% capital loss as a result. Also re questions re franking credits, excess credits are a return to the fund as well losses can be carried forward to future years. Super is a trust arrangement that is taxed at 15%. Also if you have shares in your Allocated Pension account, because it pays no tax on earnings, the franked divedends end up as cash to the account. The other strategy that I have been using is highly concentrated international equity funds that are benchmark unaware, ie they invest in companies not countries and are non hedged and that have been running with the theme of inflation in the things that we need ie food, electronic commerce etc. This is non correlatted to the ASX 8. aj. April 18, 2012 at 3:37 pm Tks Jack.