06 April 2009

Cracking the sads with the media, episode 426: The GFC and superannuation

Those who read this blog will know all about my thoughts on the media. Some of you will also be probably saying, “There’s been a GFC. Why have you been so silent?”

I admit to being busy with other stuff in meatspace, and I haven’t blogged in a little while, so shame on me. But finally, I’m going nuts again, and you can all shut up and read for all I care because there’s stuff that simply has to be said.

The media has been all over superannuation funds for quite some time. True, this is the biggest exposure Australians will ever have to volatile investment markets outside their own home. And yes, for those of you who like to read between the lines (you know who you are) there was a subtle dig buried in that sentence.

Part of the negative press aimed at super funds is simply unwarranted, and here’s the reason why: Chances are big that you need to shoulder what could potentially be the lion’s share of responsibility for that diminishing nest egg.

That’s right folks. You, or at least most of you who are reading, are almost fully culpable. Not your super fund. Possibly your financial adviser, if you have one, but this ain’t aimed at you if you have. That will be the subject of a different post, so if you have a financial adviser, you can consider yourself in the clear. At the moment.

For those of you who don’t use a financial adviser, I suspect that you are having a grand old time criticising your super fund for what is, for most of you, a year and a half of negative returns. Let’s face it; we love to have a go at stuff that shits us. As a nation, we love to stick it up the poms when they’re complaining, but to be frank; we’re a nation of whingers. Possibly even worse than the English.

We’re also a nation that hates to accept personal responsibility.

Put these two traits together, and you’re left with the kind of sensationalist reporting that sees the media (News in particular, but Fairfax is a close second) putting out tripe like this or this and Australians lapping it up like the sheep that that they are.

I’ve said it before and I’ll say it again: Australians are shithouse investors and it’s time that you were all told. As an investor, the chances are that if you’re reading this, you suck.

Permit me to now explain why you potentially suck.

Superannuation is not a type of investment. It’s a tax environment.

John Smith (not his real name) is 58 and recently retired. Naturally, he’s rather upset at his super fund’s return of -20% over the past year. And he’s only in the fund’s ‘balanced’ option.

He spots an ad for an online account in the newspaper paying 4.50% and thinks to himself, “At least this is positive.”

John empties his super fund and sticks the entire amount, lock, stock and barrel into this online account. John is, quite frankly, a goose.

On John’s current marginal rate of tax (30%), the rate of interest becomes less attractive at 3.15%, not including Medicare.

On top of this, John simply doesn’t want to know that he could have invested in a cash option in his super fund which is only taxed at a concessional rate of 15%. He’s that pissed off. In fact, the bank that offers this account also offers an identical account to self-managed super funds, thus yielding a superior return after tax of 3.825%.

And because John is not 60 yet, he’s going to be in for a fright at tax time when he finds himself hit with a tax bill in the tens of thousands of dollars on his lump sum super withdrawal.

Can it get any worse?

You bet. John also couldn’t care less that, had he switched to the pension phase of super, his assets aren’t even subject to tax on their earnings. Holding this online account within a self-managed super fund in the online phase would have yielded the full 4.50%.

Not only that, because John has withdrawn the amount from super he is going to have serious problems if he ever wants to start up a super pension, because he won’t be able to get the whole thing back into super if he tries. Amounts able to be contributed to super in a financial year are subject to contribution caps, which limits his flexibility in this regard.

John might be a retiree, but I have no sympathy for him.

Notice that I haven’t talked about John’s potential exit fees, John’s lost insurance coverage or the likelihood that he’ll miss a market upswing. Well I wasn’t going to, anyway.

You choose your investments (part 1)

Jo Phelps (not her real name) is 40 and a manager with an HR recruitment firm.

About a year and a half ago, she received her annual super statement from her fund. Jo was in the balanced option of her fund which had been performing quite respectably for the past four years posting regular returns of 15%.

Her balanced option is about 70% shares and property and 30% cash and fixed interest.

But when she saw the returns on the fund’s ‘high-growth’ option, her eyes lit up as it showed average returns of 25-30% regularly over the past 4 years. The high-growth option is predominantly shares with a smattering of property. There is about 3 or 4 % cash in the portfolio.

Jo rings up her fund and demands to have a switch form sent out. The staffer on the end of the line helpfully suggests to Jo that she speak to a financial adviser before going ahead with the switch.

Jo helpfully suggests to the staffer that she takes her offer of financial advice and sticks it where the sun doesn’t shine, because after all, all financial advisers only recommend stuff with kickbacks for them. “I don’t need a financial adviser,” she casually mentions, “please just post the form.”

The switch was processed and now Jo feels shell-shocked by negative returns of -35%.

Jo would like to know this:

  1. Aren’t fund managers meant to see this sort of stuff coming and take action to stop it?
  2. I mean, I know that there’s no such things as psychics, but couldn’t they have short-sold or something? and
  3. Given that employers have to contribute into superannuation, how come the government can’t guarantee it like bank accounts? I mean really, all Australians should be protected from the downside, shouldn’t they? They guarantee bank accounts; superannuation funds aren’t really that different…

Jo had no idea that a high-growth option could go down as well as up. Mind you, if you’d told her a year and a half ago, I don’t think she would have given a stuff.

You choose your investments (part 2)

Brad Dawes (not his real name) works in a blue-collar job. He’s twenty-something.

When he started with his current employer, he couldn’t be bothered filling out the super forms. He did ask at the time, “So let me get this straight: I don’t have to fill this in. You’ll sort it out for me with this ‘default’ thingy?”

To which the answer was, “Yes”. Natch.

About the only form that Brad filled in correctly was the bank account details for where he wanted to be paid.

The super from Brad’s current job now goes, by default, into the balanced option of the default super fund offered by his employer. Brad doesn’t know how these funds are invested, and really couldn’t care.

Brad’s super is all over the place. All default funds provided by previous employers and all different.

All the negative press about super has Brad looking at the one or two statements (out of the six or so funds he’s ever joined) that he regularly gets. Brad now has the following criticisms of super:

  1. I could invest my funds better than my super fund could;
  2. What’s with all these fees coming out? This is a scam;
  3. What do you mean, ‘Share prices have gone down?’ Isn’t super meant to be invested in property which never goes backwards? (This is Brad’s opinion, not mine)
  4. I didn’t choose to have my super here. I shouldn’t suffer as a result.

About the only good thing you can say about Brad is that he’s finally shown some interest (even if only passing) in his super as a result of this.

But he’s dead wrong about not choosing to have his super where it is: He chose alright. He’s also not worthy of sympathy.

Retirees are not always worthy of extra sympathy

Let’s go back to John Smith again. Sorry John, but you’re particularly worthy of some stick.

About three years, John decided he’d retire when he turned 58.

John’s super was in the balanced option, which his super fund recommends for periods of 4-5 years or longer. That’s right: 4 to 5 years minimum.

John consciously chose to leave his super in the balanced option, because, “It’s doing pretty well there.” Unlike Jo, he looked at the more aggressive options and thought that they seemed pretty aggressive for him. That’s OK.

He looked at the less aggressive investment options and was put off by the lesser returns. And I’m sure you can see why.

But, looking at the recommended minimum timeframe on his balanced option, he thought, “Well it’s only a recommendation.”

Fast forward to a year and a half ago. John looked at his super fund again, and he thought the exact same thing.

That’s right. With a year and a half to go until retirement, John completely disregarded the recommended minimum investment periods and consciously chose an investment option suited to 4-5 years or longer.

John is now shitted off with his super fund when really, John should be shitted off with himself.

It’s probably worth mentioning that you should plan your exit strategy from the outset. John didn’t even do this with three years to go.

So what can investors learn from this?

  1. You choose your investments. Read the sodding disclosure statements – they may look like slickly produced marketing paraphernalia (and to be honest, most are) – but they have to contain stuff you need to make an informed decision.
  2. The default option isn’t some kind of magical tool that posts excellent returns while protecting investors from market downturns.
  3. Read the bits about how your funds are invested. Also read the bits about recommended minimum timeframes. If you don’t understand how an investment option works, ask an adviser, ask the fund and if they can’t tell you, steer the fuck clear of it.
  4. No one is psychic. Especially not fund managers.
  5. Have you switched to cash? You may learn the hard way that markets can rise violently as well as fall. Chances are you’ll miss out and by gee, won’t it be costly?
  6. No one rings a bell to let you know that the market has bottomed out. Think of this if you’re attempting to time your way back in.
  7. Super investments are taxed at 15 %. Non-super investments are taxed at your marginal rate. This should be a no-brainer but you would be surprised at the number of people who couldn’t give a shit about this.
  8. When you next whinge about your super fund’s non-performance, compare it to something that vaguely resembles it. Comparing a balanced option with anything other than a balanced non-super managed fund is only going to make you look like a moron. Even that is pushing it. Do not compare a balanced super option with an online bank account – geez do I have to spell it out?
  9. Good, fee-for-service financial advisers are there to help out people who know bugger all about investing. There is a very good chance that you form a subset of the latter half of the previous sentence.
  10. I’ve heard people whinge about their super fund’s performance who are in defined benefit schemes. I’m not kidding. If you don’t know what investment option you’re in, or even the fund’s design, find out. Number 3 above should help you.

That’s it. I’ve had a gutful. You can all get stuffed.

Disclosure: This blogger works for a service company that services super funds. He also used to work as a financial planner. And he most likely posted bigger declines in his superannuation balance than the lot of you (if expressed in percentage terms).

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.


taj said...

I don't think you've told us how you really feel.

Dikkii said...

I'll have to try harder next time.