I realise that most people in their 20’s and 30’s pay very little attention to their superannuation because they cannot access it for 30 to 40 years – or possibly longer. In fact, it’s likely that the government will push out the retirement age (i.e. when you can access super) to match the aged pension age of 67. So some people reading this might not see their super for 50 years! However, the problem with taking no interest is that you will probably waste lots of money on fees and poor returns over this time. Take 3 minutes to read this short blog that shows you how to sort out your super in 3 easy steps.
Step 1: Optimising fees and returns now will have a massive compounding impact
There are three things you can control when it comes to your super:
- The administration and investment management fees you pay;
- How (methodology) your money is invested; and
- Where your money is invested i.e. what asset classes such as Australian shares, US shares, bonds and fixed interest and so on.
It is really simple to optimise these three things. Doing so will massively increase your retirement savings.
Don’t pick a super fund by comparing historic returns
No one can control or predict investment returns. Have a look at this table. It sets out asset class investment returns since super was introduced in 1993. I have coloured each asset class and sorted the returns by year. Do you notice any patterns? There are none. And no one in the world has demonstrated a proven and consistent way of predicting them. Therefore, trying to predict or chase returns is a flawed strategy that is doomed to fail. Instead, make sure your asset allocation allows you to make money in any market… more about this in a second.
Picking a super fund based on historic investment returns is a bit like acting on a tip from a friend that did well in last year’s Melbourne Cup. Just because he did well last year doesn’t mean anything this year. What is more important is his methodology. Is the methodology repeatable and rules-based? Or is it highly subjective (like active funds management)? For most active fund managers, returns are arguably influenced more by luck than skill.”
Fees will add up over 35 years
Three friends aged 30 all have $100,000 invested in three different super funds which all charge different fees. Over the next 35 years, their returns, contributions and taxes are identical. Here is what they ended up with:
- David’s super fund was quite expensive and charged him 2% p.a. in fees. His balance by age 65 was $1,088,000.
- Mathew invested his super in an industry fund (not the lowest-cost option but not the most expensive either) which charged him 0.80% p.a. in fees. His balance ends up being 30% higher than David’s at $1,416,000!
- Joanne was the smartest of the three friends and switched her super into our preferred low cost provider. Even though Joanne paid us a small fee to advise on the investment of her super, her balanced ended up being $1,582,000 – which is 45% ($494k) more than David and 12% ($166k) more than Mathew!
Step 2: Millennials are too smart to be duped by greedy fund mangers
There is a plethora of information available on the internet about how the vast majority of active fund managers fail to beat the market. Warren Buffett wrote in 2013 that “Most advisors [fund managers], however, are far better at generating high fees than they are at generating high returns.” More people (and institutions) are starting to vote with their feet and move their money into low-cost index (passive) funds. In fact, in the year to March 2016, research house Morningstar reported that in the USA index funds attracted $384bn (net) while active fund managers lost $276bn in assets under management[1]. The Financial Times reports that this year the assets of passive US equity vehicles crossed the 40 per cent mark of total US equity fund assets, up from 18.8 per cent a decade ago. People are leaving active managed funds in droves and you should be too! Make sure your super is invested in low-cost index (passive) funds.
Depending on the research you read, you have between a 70% and 96% chance of achieving higher investment returns using a passive methodology over a 5 to 10+ year period. And as more and more investors move to passive investment, it will become even harder for active fund managers to outperform compared to say 10 years ago. You can read more about the benefits of passive investing in this blog I wrote in 2015.
Step 3: A strategic asset allocation: assume you don’t know what’s going to happen in the future
Number 48 on the world rich list ($15.6bn), hedge fund manager Mr. Ray Dalio says, “I think that the first thing is you should have a strategic asset allocation mix that assumes that you don’t know what the future is going to hold.” The aim of a strategic asset allocation is to do two things:
- Minimise losses. The asset allocation we use is based on over 100 years of research by some of the smartest investment minds. Over the past 22 years since super was introduced, back testing shows that it has only generated losses in 3 years and the biggest loss was 5.1% in 2008.
- Make money in any environment. Typically, when one asset class is up, another is down. But it’s not about spreading money evenly because different asset classes are more risk (volatile) than others. Back testing of the base asset allocation we use demonstrates an average return over the last 22 years of 9.10%.
Finally, disciplined and regular rebalancing of your asset allocation as well as making subtle strategic weightings are important too.
Switching your super is super-simple
We advise lots of clients on where to invest their super. Firstly, we don’t take any commissions whatsoever so our advice is conflict-free. In short, we don’t care where your super is invested – as long as it’s the best place for you (i.e. low-cost, passive and smart asset allocation). Switching your super fund is surprisingly easy… it typically only takes a week to switch plus a quick email to your payroll department and you’re done. Just to be clear, I’m not talking about a Self-Managed Super Fund – they suit some people – but not nearly as many people that have them. There are often better, simpler and lower-cost alternatives.
If you need help, simply drop us an email.
[1] Click here for the report
