Simply stupid superannuation

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.

You can follow Chris on Twitter.

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  1. Yep, time in the market is not enough. You also need to time the market, with respect to the big swings, not the short term fluctuations so much of the media reports.

  2. Chris I love that Galaxy report as it has hit the nail on the head. It is not all the fault of the system but the complexity certainly does not help. It is in our human nature not to be engaged with a process that will not see us have access to the benefits for 40 years and instead we concentrate on what we can access and can control. The dumbing down of choice to use strategies like “defaul” “balanced” or “core” without the ability to see the returns on the underlying investments just makes people feel that they do not have control and the outcome is a fait a compli.

    If they saw the actual dividend payments and franking credits from each investment or the 5% return from a term deposit instead of 3.25% for their cash then maybe they might become more engaged but the tyranny of time and “busy lives” is that people opt to focus on what matters to them now not in 40 years.

    The recent Core Data Member Engagement Survey clearly showed that those who were more engaged like SMSF members were satisfied with their funds.

    Education is the key to engagement and not just with the young. I had a seminar last night on investing for income and had 54 and 77 year olds admit that they just had not looked at their options in years. Others who had taken control, were reviewing and altering their asset allocations regularly, gave their feedback and it was easy to see who was the happier with their finances.

    I don’t know how to get 20-30 year olds interested in Super but I can tell you that the 35-50 year old group have woken up and they are starting to get more engaged. It might be the ability to invest in property via Super that grabs their initial attention but once they start looking and questioning they are no longer satisfied with “Default” . This has to be a good result rather than apathy.

    • Well said Liam – as I glanced at in the post, investing in property may be the “trigger” that gets younger superannuants to wake up.

      I’m now in your later bracket (the 35-50’s) and have been fully engaged in super because I went self-managed. (got 2 dividend cheques yesterday in the mail! woohoo!)

      There are retail products that are similar to DIY/SMSF, without all the regulatory hassles, that could help people in my age bracket or even younger get more engaged.

      Might need to look at these in the near future….

      • I’m in the earlier bracket (20-30) and have just changed to a retail option that has the ability to let me choose from ETFs and shares or let them run with it. To be honest, I feel I don’t have the time to be completely ‘into it’ at the moment with work and the small amount in my super (compared to older people).

        I have my dad and FIL to thank for becoming ‘interested’ (more stressed about not having ‘enough’ at the end), they both lost a colossal amount (more than our current house is worth…) in the ‘first’ GFC a few years ago.

        I’d love Macroinvestor or Macrobusiness to do something for the ‘younger’ readers, as a small difference now will make a massive one later. Plus the usual offerings from the big four, are, from what I can see/tell with my limited knowledge, craptacular.

      • You are definitely our number 1 audience with regard to super chunderfuzz (nice handle!)

        I’ll be looking at developing a series of articles in our “Classroom” series with Liam and others on how to do exactly that (along with a big series “Macro-Trading for Dummies”)

        On the strategy side, we will be updating the “Portfolio” section soon to give weekly updates on strategic (i.e what type of assets) and tactical (i.e specific products) portfolio allocation.

        But yes, a beginner series of “this is how you should set up your super” would be extremely helpful methinks.

        • Sounds great, I’ve been following the portfolio etc, but not really understanding what was going on (or why). Look forward to it :).

        • Prince, I recently graduated and am in a relatively high paying career with low expenses. I have managed to make a decent investment return (after doing a lot of research including using MB posts for ideas) on just saved income and am looking to get more involved in my super. However I don’t really have the time or money to get into SMSF. There are a lot of other options like wraps and such to the point where it is confusing to pick a direction. If you could possibly start a series on such a topic, I reckon that’d put me over the line in purchasing a MI sub if it means I can emulate my savings returns with my super.

        • Brilliant, the ‘Mcaro-Trading for Dummies’ is exactly what I asked for in the recent Macroinvestor survey, thanks!

    • 20-30 year olds have time + not enough in super to care. When I speak to my peers in this age group we all agree to treat super as a bonus and to create enough money and wealth out of super to retire. 20-30 won’t be retiring until they are 80. Thats 50+ years.

      When the rules are changed each year by governments how can you successfully invest in super. Whats worst is that the rules usually work against you.

      Only a fool believes that the government can supplement a comfortable retirement.

  3. superannuation is kind of a tax collected by financial speculators. Like with many other taxes, taxpayers are not likely to see anything returning back to them.

    • with all due respect Raveswei that is complete rubbish. I know many people who have used the superannuation system well and are now comfortably taking a $55K+ tax free income from a pension and supplemented by outside earnings on other investments they have a very comfortable lifestyle with access to the Seniors Healthcare Card and pay no tax.
      they are predominantly small business people and middle level management who made the effort to use the system to their advantage. Superannuation is an investment vehicle just like a company or a trust and it how you use that vehicle that matters.
      If you are going to scoff at it and drive blindly then of course you will crash!

      • Typical response from a rent seeker defending his profession. Super inflates the pool of funds for the financial system, without super you would have to compete in the market place for a smaller pool of funds.

        • Labrynth, there are two basic ways that we as a society can fund our retirements: the government can pay for it through pensions, or people can pay for it themselves through their own savings.

          The super system is really just a series of tax concessions to encourage people to save for their own retirement, because experience to date suggests that relying on the government and pensions results in massive unfunded liabilities.

          So if the super system is so broken, what is your suggestion as to a replacement?

          • @pconners

            “The super system is really just a series of tax concessions to encourage people to save for their own retirement”

            This is not quite right:
            supper is series of laws that FORCE people to “save for their own retirement”

          • that was the intention, but is may paradoxically have forced others to save for retirement in other ways – property e.g

            Personally, I do not see my superannuation for retirement purposes. Its really my long term health insurance plan (and a big hedge).

            I’m doing all of my wealth creation outside of super, because I can access than now, not ephemerally in 35-40 years.

            I contend the whole concept of retirement is broken and outdated. I intend to “retire” at 40…then 45…then 50 again…and then???

            Again, I have the skills/abilities to do this outside of super – if it wasnt for our land bubble, high house prices and other factors, most Australians could do the same…

          • Again, I have the skills/abilities to do this outside of super – if it wasnt for our land bubble, high house prices and other factors, most Australians could do the same…

            I think that’s drawing a mightly long bow.

            The typical worker – people like retail assistants, secretaries, teachers, mechanics – do not have a hope in hell of ever being able to enjoy the financial security you do. Even absent any land bubble, the average person simply doesn’t have the financial resources to stop working for any length of time.

        • You’re entitled to your opinion Labyrnth, but you’re wrong. Also, have some manners if you disagree or you won’t be able to disagree again ok?

          Its only because of people like Liam that investors are able to navigate around the super traps – most laid by government and big business/Megabank. The fact we need super specialist and accountants and even lawyers is testament to this political and corporate capture.

          How about picking on your local member or local Megabank Branch instead?

      • super is very important topic that nobody seems to mention.

        What do you think how long that “superannuation based comfortable lifestyle” will last and for how many people will work ever?

        All schemes work fine at the beginning when only few people are taking money out. That’s one of the main features of ponzi schemes.

        The idea that super is good if “people drive it properly” is the exactly what government wants – removal of all the responsibility for a failure to take care of old people and at the same time provides steady cash for financial speculators (part the other partner in this scheme needs).

        Superannuation is not more effective than voluntary savings. People “who have used the superannuation system well” (“predominantly small business people and middle level management who made the effort to use the system to their advantage”) would succeed creating very comfortable retirement lifestyle even without superannuation in place. These people were never group superannuation was aimed to help. People with no such capabilities are forced to earn less at present (reduction of their standard of living) with no benefits in future. So, as I said, super is good for small group of people who take advantage of all the money other people with no benefits put in.

        What I find interesting is that government is not concern about our ability to manage complex financial matters that will affect our lives during 25% of our lifetime(gov thinks everybody is capable of successfully driving superannuation). At the same time government is very concerned about our ability to manage simple things like food intake by regulating junk food portion sizes or our ability to choose TV or internet content we are watching by censorship.

      • Diogenes the CynicMEMBER

        That is true but the legislative risk has become much greater in the last five years. The continual tinkering to contribution caps, pension arrangements (remember TAPS now they were a great deal), SMSF levies from $45 to $259 in five years thanks Labour!, punitive excess contribution penalty rates of 93% and the constant temptation by the federal government to want to dip its hand in the honey pot by increasing taxes. It is very likely that the tax free nature of over 60 superannuation payout arrangements will be altered and/or changing the access rules, i.e. you need to be 70 or higher to access your super.

        Note I do have a SMSF and it has grown steadily over the last ten years to above the median values, but I have not contributed a voluntary cent after FY07. Why bother? Tax savings on voluntary contributions are minimal, with the possibility of not ever seeing the money (you could die young). Even if I do survive to a ripe old age if the access rules are changed it could be 30 years before I can scoop it out.

        Superannuation is a useful tool but mainly for older people closer to retirement age (within 5 years of the magic 60). For those younger than 30 or even 40 it remains a very distant goal, where the goal posts seem not only to be moving sideways but also backwards. Pay off your mortgage young people that will help you far more than sacrificing to the superannuation Gods.

        • Diogenes I agree with you here, and that’s why I think it’s foolish to voluntarily contribute to super unless you are ridiculously rich.

          However, that 9% is coming out of your salary whether you like it or not, and for young people like me that will actually add up to quite a bit over the long term. No matter how the Govt screws with it, you can either choose to actively manage and grow it, or you can choose to let it languish in never-ever land with the fund managers.

          I think more people should choose to educate themselves, and I think the Govt should make super easier to manage and understand. But it’s going to take both sides to come to the table if super is really going to work.

          • Diogenes the CynicMEMBER

            I am with you on compulsory super and financial literacy – it is your money after all and young people should know what is happening to it. Reduce fees would be my top recommendation!

            But for voluntary super, it is only attractive if you are close to retirement, otherwise the legislative risk is simply too great.

    • That statement is incorrect in almost every way.

      “Superannuation” is a tax structure. It just happens to come with some terrific tax concessions.

      How assets are allocated within this tax structure is entirely a matter for the individual. You can hold cash, fixed interest, shares, property, bullion, artwork…. etc…

      As simple as it is, this concept is misunderstood by most Australians. I think the govt. continually tinkering with the system is a root cause of this, but it is what it is.

      I think you’re partially right about “taxpayers are not likely to see anything returning back to them”…

      The structure (tax concessions, preservation etc) of super is there to encourage Australians to save, so that when we retire we are less dependent on social security. You only need look at population demographics to see we have a problem on the (fast approaching) horizon. …this is intended (in a round-about-way) to deliver a return to taxpayers (i.e., reducing future liabilities).

      However on the other hand, current rules whereby super assets can be commuted to an Account Based Pension (superannuation pension), and within this account all earnings are tax free, and all drawings once over age 60 are tax free, means that not only are we (as a nation) footing the bill for the upfront tax concessions on contributions, but we also forfeit tax on earnings and income from these sources when superannuants retire.

      So in summary; super is not a tax. It does not force anyone to invest in shares, or any particular asset for that matter. The benefit is available to pretty much every Australian, if they want to use it. Over the long-term the Australian taxpayer does indirectly foot the bill for the tax concessions.

      Hopefully this clears it up a little…

      • It’s a kind of a tax because it involuntary.

        how assets are allocated is not important, what’s important for speculators is “conversion” process.

        And majority of people with not see much of it in future while they already feel almost all the negative effects right now.

  4. Superannuation is forced gambling. No matter what choices you make there are no guarantees of a comfortable retirement. A ridiculous scenario.

    • This is not true. Super is compulsory saving, in a tax advantaged vehicle.

      There is no compulsion to even “invest”, let alone “gamble”.

    • True however that there are no guarantees. That is the whole point of defined contribution pension regimes – the liability rests with the individual.

  5. $17billion in lost super, the government is collecting $675million. Watch the definition change so that the government can get its hand on all that “lost super”.

    Is the lost super going into consolidated revenue and only paid back if requested?

    • I lost $1-2k in super from when I was working while at uni, it disappeared in insurance fees and other fees they charge until $0 was left. Although I can’t see the larger implication of the government using it while no one claims it, can they do much worse than what’s been happening already?

      • thomickersMEMBER

        unlucky because this scenario is far too common…but on the bright side lets say you died or were disabled, the trustee of the fund would have provided a sum of $150k-$250k.

        I hope you don’t reject the notion of insurance from this. Very very important…

        • But would they have found me… (and no I don’t reject the notion of insurance…to a point).

          • thomickersMEMBER

            The executor of your estate will search for your superannuation benefit.

            Hope you have a Will in place. Going intestate is another bad situation!

    • Devils advocate here: would that be such a bad idea? It’s pretty easy to find “lost” super. If an individual doesn’t take care of it (like any other asset) then maybe the rest of the country could?

      Latest govt. proposal will see “lost” super tucked away & paid a notional interest rate at CPI.

  6. I would argue that its nots super per se but the financial services industry.
    I have been ranting about the bulk of managed funds and their striving to be mediorce and benchmarking agaisnt index etc since about 98.
    There are very few fund managers that can outperform all the time, most of the good boutiques end up being taken by megabank and lets face it megabank has the bulk of the advice and distribution/clearing house channels even for the industry funds.

    Keatings original concept was correct. We now have 95% of the workplace covered. The biggest issue for those under about 45 is that the bulk of their super will probably end up paying out their housing debt. The whole issue of malinvestment.
    Which I believe is the issue for super.
    Positive developement though are the advent of some of the low cost wraps that allows investors to purchase what features they want and no fees or admin for cash and term deposits,mainly cause mega bank wants the funds

  7. “…most super portfolios are still in the red or have gone nowhere for the last 5 years.”

    Is it data cherry-picking season already? Here’s what I just picked:

    ASX200 accumulation index in 2007: 39,113. In 2011: 34,201. Looks bad.

    ASX200 accumulation index in 2006: 30,405. In 2011: 34,201. Looks good.

    ASX200 accumulation index in 2005: 24,534. In 2011: 34,201. Looks very good.

    ASX200 accumulation index in 2004: 19,417. In 2011: 34,201. Looks outstanding.

    Your move!

    • I see your cherry and raise you this: 2004-2007 was the biggest move in the ASX200 and All Ords since the last stock market bubble in 1984-1987. In other words, a one in 20 year bubble.

      Here are the end of calendar year nominal results (doesnt include dividends – not in front of my Bloomie terminal atm)
      2004: 22%
      2005: 17%
      2006: 19%
      2007: 12%

      The only time before that the market had annual returns anything like that was 1999 – at the end of the tech bubble – up 14% and in 1993 up 35% – the end of the last recession. Every other year the average was single digit. It took the entry of China into the WTO, a new massive commodity boom, a property boom and a credit bubble unseen in human history to drive those returns.

      So if you happened to join super in 2004 – up 10% a year (in theory if your fund follows the index) Well done! 2007, 2008? You’ve gone nowhere. 2009? not bad…2010 nope 2011 nope – barely above inflation returns
      Check out the SuperRatings website to see how this theoretical return of the indices has translated into real returns for the various managed funds.

      • Prince, I must confess I’ve read this article a couple of times and I’m struggling to see your point. It’s easy to look back in time and say “Gee, it would have been smart to get out of shares in 2007” but obviously much harder to do that prospectively.

        Likewise, if you had been out of shares since the crash in Sep 2008 you’d have missed out on the subtantial rally since Mar 2009.

        Are you making an argument for market timing, or simply saying that most super portfolios are over-allocated to equities?


        • Both.

          I’ve made the arguments before (check the category “superannuation” and “investing”) on a micro and macro (i.e the whole industry) level.

          Timing the market and being under allocated to equities strategically (balanced used to be 50/50, now its 70% equities, 30% defensive – I would suggest 50% is the maximum for all) is key for most investors. It doenst mean day trading, even a simple 200 day moving average crossover (using end of week pricing) and some basic capital management tools would have you out of the markets in the GFC.

          • I agree with the 50% concept. I also believe in having balanced index funds that automatic rebalance such as Vanguard due to low costs as well as direct equities and offshore investment that are not benchmark aware. People are not always able to take advantage of strong movements in asset values

  8. The whole purpose of super is for retirement. Paul Keating’s vision was a pool of savings that would offset our CAD.
    Malinvestment, greed and vested interests have corrupted this outcome.

    The push for residential property in super in my opinion is as ridiculous as buy and hold a parcel of shares.

    The whole thing in my view is having sufficent liquidity within your portfolio to cope with volitity and take opportunities. Most people are apathic and cant give a rats

    • Super was created to give more power to the unions.

      Read this quote from the 28 September, 1989 edition of the Sydney Morning Herald:

      ‘The Treasurer, Mr Keating, has urged the trade union movement to use the billions of dollars generated by superannuation over the next 20 years to increase its own industrial clout.

      ‘Mr Keating told [trade union] Congress delegates that the development of union-run superannuation funds would give the union movement “institutional muscle” to supplement its already substantial industrial strength.

      ‘He suggested that the additional clout could prove a potent weapon against conservative administrations intent on eroding the power of the union movement.

      ‘In a “hostile political environment”, unions could flex their institutional muscle in the financial sector instead of simply “passing motions in the trades hall”, he said.’

      • Yep I agree with that as well. Keating was killing two birds with one stone and he was a heck of a salesman

        • Actually it did a third critical thing. Attaching giant super funds to Unions required the unions to act in the interests of the funds, often ahead of the interests of their members.
          Unions have been brought into the game and now have to be concerned about what the market thinks and stock movements etc etc.
          So where a policy might advantage Workers but disadvantage wealthy investors or super funds the unions come out against their own members.
          It’s a genius move and has the Unions now well and truly part of the big business interest.

          • I totally agree with this. One of the key mechanisms that large capital has used to gain control over the politics of regulation is to give a little bit to the mums and dads.

            Making the punters feel like they are part of the game means they can be easily manipulated to support agendas that smash the small and feed big capital.

            It has significantly compromised the ethics of the unions and has been instrumental in turning the parties into the corporate support party.

  9. 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.

    But how do you know it’s the top of the market?

  10. Prince, I find your posts insightful and interesting, but I also think the messages you send to your readers are potentially dangerous and are presented as fact when they are your own philosophical beliefs, which may in the fullness of time turn out to be flawed.

    This particular post pulls together many varying and differing issues, your own opinions, some snapshot data which is very sympathetic to your argument, and some potentially questionable conclusions, seemingly with the primary purpose of allowing you to conclude that you know a better way of running money, because it has worked for the last five years. In the interest of trying to provide some balance, my opinions are as follows:

    Your analysis of return streams and compounding is absolutely valid, but the fact remains that, given long enough, the equity risk premium has more than compensated for the variability of returns. I know you’re going to say “volatility does not equal risk” and I agree, but volatility does provide a useful measure of describing the potential return experience of diversified investors in an asset class. History has shown us that equity risk premium has, over time, rewarded investors for assuming equity risk, and to a greater degree than any other mainstream asset class. It has done so by achieving superior compound returns (which as you well know, takes account of volatility). The equity risk premium is real.

    The only way to improve the reward-risk ratio while maintaining compound returns (assuming no gearing) is by taking specific/concentrated risks, finding assets or asset classes with higher compound rates of return and lower variability of returns, or by timing your entry and exit into market risk factors with the aim of foregoing much of the downside and capturing enough of the upside that the compounded return is superior. Clearly what we have here essentially boils down to investment selection and/or market timing – something that is very difficult to do in a consistent and repeatable manner. In any case this is a return enhancement accruing to skill (or luck) and any skill based return also introduces other risks, including key person risk. In addition to the statistical reality that someone who appears so ‘skilled’ may just actually be experiencing a very good run of ‘luck’. Another approach, of course, is to identify assets or asset classes which offer a different type of return premium.

    We have the rise and rise of hedge funds, which of course are part skill, part different premia, part gearing, part illiquidity. You pays your money and you takes your choice, but clearly there are different risks involved here. Commodities? The long term data is questionable.

    We also know that in a large enough market, skill-based returns cannot, in aggregate, exceed market returns. Also, it is probably of no benefit to anyone to retrospectively declare that if you had have sold equities at about the time of one of the biggest market declines in history, you would be better off five years later.

    For what it’s worth, I think there is merit in a medium term valuation framework which expresses preferences for some assets over others. It makes no sense that an investment adviser should recommend the same exposure to equities in December 2007 and March 2009. Price has to play a part in the allocation decision. However, this should also be tempered with some humility and the knowledge that returns can only come from a limited range of sources, and many of those are skill-based and potentially carry a whole new set of risks.

    The problems are not just in superannuation, it is industry wide. Certainly, superannuation suffers from prolific complexity, which needs to be addressed. But to use the structural flaws of the superannuation regime to criticise major investment philosophies with which you might not agree, is not in itself a valid criticism of super.

    Part of the problem is education. There is clearly a major failing of the investment industry generally (not just in super) to articulate equity risk and to educate investors that history has presented extended periods of zero or negative real reward for equity risk. Any reasonable expectation of return and risk from (diversified) equities should present a not insignificant probability of periods of ten or more years where compounded real returns are flat or negative. The rates of returns experienced in the 80s and 90s were anomalistic in capital market history yet, unfortunately, most of the investment industry told their clients (explicitly or otherwise) that this is the norm. (A bit like housing now.)

    Another part of the problem, as you correctly state, is that the high return, low volatility 80s and 90s has resulted in industry-wide asset ‘balanced’ allocations which are no-where near ‘balanced’ in a risk sense. Again, this is not super’s fault and is an issue outside super as much as it is in.

    However, I believe it is very bold to declare to a cohort of 30-somethings that buy and hold investing is a waste of time. That’s the sort of thing a product flogger would say, not an unbiased adviser. Which probably gets to the crux of it – anyone reading this blog should keep in the back of their mind that ostensibly its primary purpose is to attract Macro Investor subscribers.

    • Fair comment but you are massively understating just how rotten and greedy the retail super market had become – there was a shameless rush to put people in high risk positions solely for trailing commissions, and the buy and hold meme existed for the primary reason of protecting these trailing commissions. No valuation risk dare step on top of those trailing comms

      Have the retail super providers changed their spots…just like a leopard I reckon.

      • That’s a rather different discussion. I am no way defending the industry, poor practices, bad advice or misaligned incentives.

  11. Great thread thanks Chris and all.

    just this one
    “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.”

    That’s why you double-up the bet 🙂

  12. I think moves recently on the topic towards more balanced “balanced funds” are a good thing long term. Australia has had too big a bias to shares.

    But making the change now seems a little silly to me. This is because people would move large parts of their funds (20-30%) from an undervalued asset class (equities) to a very overvalued class (fixed interest).

    So I think balanced funds should be more balanced, but doing so now is the wrong time.

    Me? I am 100% in international equities unhedged. Why? Australian economic vulnerability is starting to show but not priced into our currency or assets.


  13. I too am in unhedged global equities, and cash.

    But I don’t agree with you that equities are under valued.

  14. Also, the chart above completely undermines the nature of risk and return, and the reasonably expected relationship between the two.

    It compares a 9% per annum average, zero volatility return stream to a 7.7% average per annum (approx.), 6% volatility (approx.) return stream.

    First, zero vol return streams are almost impossible to find. Riskless deposits are the closest thing, but rates still change so there is some degree of volatility present.

    Second, you have skewed the vol on ‘ABC Pick’ to the downside.

    Also, it is entirely consistent with both mathematics and rational expectation that the latter return stream (lower average return, higher vol) will compound at a lower rate than the former (higher average return, lower vol).

    To select ‘ABC Pick’ as a means of achieving the objective, the investor must be satisfied that the return offsets the erosive impact on compounded returns, of the volatility.

    In other words, include some upside volatility as well as downside volatility in your returns for ‘ABC Pick’ and it doesn’t take much to meet your objective over 10 years.

    For example, given that you put a circa -15% return in year 1 and negligeable return in year 2, then include some upside vol. Instead of filling the rest of the series with 9%, make it 11% and include a single 35% return year and, lo and behold, you meet your objective over ten years. It’s all about risk, return, and time.

    (I’m guessing the returns here – I don’t subscribe to MI – but you get my drift).

    If this chart serves to highlight the impact of behaviour, or psychology, then fair enough. But it shouldn’t be intepreted as a representation of investment theory.

  15. Prince, the article is interesting, but the issue you raises is far from the reality, I mean – your advice is delusional. How many people are working in financial industry like you? Only those people can manage their investments wisely (at least this is the presumption). The rest of the population is professionally experienced in many other areas, in which you and other financial gurus are not.

    You are right that the superannuation funds have done poor job, but this is a different issue from the one that everyone has to manage his own retirement savings. Can you make a surgery, can you solve a hard mathematical problem, can you do some complex engineering job or even suggesting engineering solution etc… I can continue with many other professions. Why those people HAVE to think more than anyone else in financial industry? Just because they haven’t studied finance they have to do double work in their life. But if everyone become financial specialist and observes the market every other day to make sure his super is growing well, who would teach your kids, who would look after your health, who would do the dirty jobs, who would farm the land etc.? Please, instead of suggesting that everyone has to take care of his own super, look at the real problem – the incompetence of the fund managers (financial specialists) and the wrong system of stimulus and bonuses they are paid. If we change the stimulus, maybe the people in charge with our superannuation will start doing their job properly. Then all other professionals would be more focused on their jobs too and we can have better productivity in the whole economy. And maybe than even the markets can get improved….

  16. et_obrienMEMBER

    The thing I’ve never fully been able to grasp about mainstream super is this: How can we all expect (as per the promises) to get out more (in real terms) than we put in?

    Is it some kind of magic pudding arrangement that I’m too dull to comprehend?

    How’s this for an alternative: Save your super in ounces of gold, like we all used to do back in the days of sound money.

    Suddenly all the discount rates, forecast return projections and associated professional rent seeking helpers go out the window and it becomes a very simple calculation indeed.

  17. The purpose of superannuation when devised by Paul Keating in 1985 was quite simple – to protect and enrich the Sydney finance industry by feeding them captive customers.

    When the Victorian Liberals ruled Australia from 1949 to 1972 it was Melbourne’s manufacturing industries which were protected – through import tariffs. That may have damaged the country as a whole, but it fulfilled its primary purpose of enriching the friends of those in power.

    Manufacturing protection was a system that collapsed under the weight of its own inefficiency. But rent-seeking is the defining characteristic of Australia. It didn’t go away. It simply moved its base from Melbourne to Sydney.

    Superannuation has failed in almost every respect – except that for which it was devised.

    It began as a voluntary scheme, but it was soon made compulsory for wage and salary earners.

    It was originally a “savings” scheme, but for those born after 1960 the age at which they can access those savings is pushed out ever further. Realistically, young people are never going to see any of the money they believe they are putting into a “savings” scheme. They will die with large balances unaccessed, and the Government will reclaim them on the grounds that “tax-advantaged” savings should not be a windfall to their heirs. It will be a de facto death duty.

    It has not increased national savings levels.

    Much of the so-called savings has in fact been recycled straight back to government through the sale of government monopolies, through tax-farming arrangements (such as the sale of road-tolling rights), and through hideously expensive public-private “partnerships” to finance government capital expenditure.

    The one and only thing that superannuation has succeeded in doing is the one thing it was set up to do – enriching fund managers and their support industries (mainly in Sydney) by feeding them captive customers who must pay at least 1% pa year-in-and-year-out on what they are told is their “savings”.

    Like Melbourne manufacturing protection, it is a system that will eventually collapse under the weight of its own inefficiency.

  18. We don’t know how lucky we are….. much of Europe includes significant employer (lesser employee) contributions depending upon country going into a state fund which is not transparent. Even better, fat chance of ever having significant access in future while present payments in are used to pay pensioners out now……

    In Australia, like home economics some high school level education in finance, tax, super etc. could be useful while more scrutiny and reporting on super fund performance be available. Most people are unable to take any deep interest as they do not understand, plus often have very short term horizons and pressure to do property…….

  19. The whole idea of forced financial contribution to an industry that has captured the political system is bankrupt.

    The explosion in finance industry managed retirement funds has led to the biggest shark feeding frenzy in history! With so much OPM washing around the planet looking for ANY kind of yield, every jew on Wall Street is out scamming and re-scamming pension funds with worthless ponzi schemes and they all continue to get away with it so far due to their having bought-off the political system (and by direct result – regulators and enforcement) with those ill-gotten gains!