By Chris Becker
Superannuation is one of, if not the most difficult financial constructs of the modern age. Forget collaterised debt obligations, interest rate swaps or contracts for difference. The complexity involved for what should be a simple proposition – save some money for retirement so the government doesn’t have to – has boiled over in a magma of confusing and continual policy changes, turgid legislation, overwhelming regulatory requirements, unreadable annual reports and a glossary of terminology that would have most physicists reeling.
A recent Galaxy survey of young Australians, aged 25-44 reinforced the notion that super is not so “simple”:
- three in four Australians believed super terminology was a barrier preventing them engaging more actively with their super fund.
- Six in 10 people picked negative descriptors such as “boring”, “baffling” and “difficult to understand”, “dull” and “for people older than me”.
- One quarter of respondents selected positive phrases like” interesting” or “motivating”.
How has this happened when in effect, superannuation is basically just a savings account? Beyond the constant political meddling, e.g like the recent burrowing into “lost super” to fill the darkening black hole in the Federal government’s mini-budget, the real problem is the core strategy espoused by the financial industry for superannuation.
“Buy shares and hold them for the long run”. And that’s about it. Buy some shares, cash them out when you turn 65 (or 75 for the majority of our readers, who average around 35 years old like those in the survey). Now, the push is towards “buy property”, to support the ongoing housing melt as the Baby Boomers sell down their once negatively geared properties. More on that later – paradoxically it might be the better strategy for the times…
Notwithstanding the 20% rally in shares this year, and the evocations from the permabulls, brokers, planners and fund managers who rely upon your compulsory 9% superannuation contributions to fund their business (and bonuses), most super portfolios are still in the red or have gone nowhere for the last 5 years.
Why? Because too much was allocated to shares. I covered the APRA annual results on super fund performance recently, but SuperRatings has released a more timely update on the “default” balance fund performance:
For the year to September 30, the median balanced fund has surged 8.2 per cent and the best-performing funds almost 10 per cent.
About 60 to 70 per cent of Australians are in a balanced fund as it is the default option for most super funds.
“It may have taken a while, but despite difficult market conditions, it is great news for members to see the median fund back in line with the pre-GFC high,” SuperRatings founder and chairman Jeff Bresnahan said.
Indeed it has taken awhile – what Mr Breshanan does not mention is the great opportunity cost – investing is not just about getting the best return, but getting a return at all. To sacrifice five years of zero returns is dangerous to both retirees – who require 20 to 30 years of growth in their pensions to keep up with rising cost of living, but also Gen X/Y/Z who need the biggest and earliest kick-start possible to let the effects of 30-40 years of compounding take hold.
At Macro Investor, I recently wrote in our weekly Classroom article about the perils of opportunity cost when holding on to losing investments in the short term, where an investor held an under or non-performing asset, versus a strategy where she just cut her losses and re-allocated the portfolio:
Let’s assume that Investor A after two years decided enough was enough and sold the position and reinvested the capital, gaining the profit objective of 9% per annum for the next 10 years:
As the chart above shows, the initial bad allocation decision is now compounding. It would take nearly 14% of compounding annual returns to catch up to the original portfolio objective of 9% per year.
Not only has there been a short term loss, the long term magnifies both the bad investment and the allocation decision to “hold through the tough spots”. This is why even younger superannuation members should rethink what they’ve been told that “time will smooth out the dips and valleys”. The statement is true, if your time period is long enough, but how smooth do you want your retirement savings to be? 20% below? 40% below potential?
If you want a lower retirement income, forget about a staid “balanced” fund with 70% of assets in shares – which is the default option for the majority of Australians. Strategic allocation matters at the right time – there is a time and place to have a majority of your assets in shares and a time to step aside. Having one strategy over your entire retirement savings period is not “balanced”. Its delusional.
As is calling 5-10 years “long term” or comparing single asset classes against each other over these periods. The really long term is 20-40 years later when you rued the day you held on to your shares – or gold or property or cash – at the top of the market instead of selling and then buying later as your strategy changed.
Time is money. That is simple to understand surely?
Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest. A free 21-day trial is available at the site.
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