Blog: Super Mistakes
After owner occupied residential property super is often the biggest asset of a household. In spite of its financial importance super investments are very often neglected with many super holders or super trustees in the case of an SMSF and investor often mak the following quite common super mistakes
- Not having a plan
When I talk to new acquaintances in a social gathering the subject usually comes to what I do professionally and we then talk about investment and super. It usually strikes me how inexperienced most people are with everything concerning investments. Many people usually totally ignore their super. They know that the super guarantee payment is put into their super on a regular basis but usually do not know and do not really care in which asset classes the super is invested, what insurance coverage they have (and if they really need it), how much the insurance costs, what the fees are and what the performance over the last few years was. Many super holders simply do not have a plan. Super just sits there on auto-pilot, neglected, put in the ‘too hard’ basked. Given that super is a major asset of a household it deserve its proper attention and the holder needs a considered plan on what to do with it and how to invest.
- Thinking super is a short term game
Super, as we all know, is supposed to fund our retirement so that we do not have to rely (solely) on the government pension. As such, super is a long term investment, starting when we begin our career and ending when we die (with hopefully still some funds left for the kids). Super is therefore a long term game and we need a long term strategy. Short term returns do not really matter in the big scheme of things. We need a long term strategy seeking to achieve reasonable long term returns which compound over a working life. Jumping in and out of assets with a short term trading strategy is usually not helpful.
- Not having an investment strategy
Many super investors simply do not have an investment strategy. Even if they know the insurance cover, the fees and charges and the performance, they are very often in the default option suggested by the super provider be it a private or industry super fund. This will usually be a balanced fund with a bit of cash, a few bonds and a few shares, mostly Australian but hopefully also some international shares. This allocation may not always we right at the life stage of the super holder and will very often be too conservative given out increased life expectancy. Younger the super investors should have a higher the share of equities as the equities return over a longer time period tends to be higher (and often significantly higher) than cash and bonds. If the super holder does not have a high degree of financial literacy and does not want to do something about it and does not want to allocate time for investment decisions a long term buy and hold strategy with a high degree of equities both domestic and international would be warranted. This would result in an average return of about 8 % to 10 % per annum for most 10 year holding periods with some holding periods showing no return or even slightly negative return. The advantage of such a strategy is that is requires practically no time from the part of the investor. It results in dollar cost averaging whereby the same amount of money is allocated to equities on a regular basis buying more shares in a bear market and fewer shares in a bull market. The problem with such a strategy is that the investor must not do anything; he must not be overly enthusiastic in a bull market and not overly depressed in a bear market. He must stick to his guns and be able to handle every so often a drawdown up to 50 % or so. This is psychologically not easy. An alternative would be to try market timing and reduce equity exposure at the onset of a bear market and increase equities at the beginning of a new bull market. This requires knowledge, the discipline to look at the markets on a regular basis (let’s say weekly), and an investment strategy which tells the investor when the market has turns so that equity exposure can be adjusted. The time required does not have to be significant and the changes in investment options does not have to be frequent but the super investment needs to be on the investor’s mind requiring a large amount of self discipline. This is not easy but can be achieved and this would allow if successful increasing the performance by a significant percentage. Increasing yearly returns by just a few percentage points will make a huge difference through compounding over the lifetime and as such the effort and time spent on developing and implementing an investment strategy will be very worthwhile.
- Extrapolating past returns
“Past returns are not indicative of future returns.” Every product disclosure document tells you that and we sort of know it but obviously still look at past returns and still believe that past returns will provide a guideline for future returns. However, looking at just a few years and extrapolating those returns immediately into the future will give us very often falls hope or unjustified despair. Markets are always changing (and as they change stay the same) but you cannot presume that the last let’s say three years returns will also occur the next three years. So it is important not to be over enthusiastic after a longer bull run and not overly depressed after a bear market. Markets change and no bull and bear market lasts forever and after a period of outperformance a period of underperformance, i.e. regression to the means, will follow. A sound investment strategy will allow the investor knowing when markets change and thus lead to change in asset allocation.
- Staying in cash
Many super investors don’t know what to do with their super and the constantly changing market conditions and the hype, drama and fear mongering of the financial press will usually frighten many investors. The logical but wrong response would be to play it safe and keep the super in cash as cash is safe. However, cash scarcely ever beat inflation and after tax usually does not maintain the purchasing power. The peace of mind achieved with investment in cash is a price too high to pay as it does not allow increasing the super fund balance through compounding over time. There is a time and a place for cash if and when the investor has a thought through investment strategy trying to time the market. However, if the investor is unable or unwilling to educate himself to develop and apply such an investment strategy he would be better served with a buy and hold strategy and dollar cost averaging having (depending on age) a higher allocation in equities.