Switching After A Fall Locks In Your Losses

Sydney Morning Herald

Saturday July 5, 2008

Annette Sampson

It would seem like the easiest decision in the world. If your super fund isn't performing, ditch it for one that is. But what do we mean by not performing?

Thanks to a lousy day on the sharemarket on Monday, super funds will report their worst financial year since the 1980s. Researcher SuperRatings reckons the average balanced fund will be down about 6.4 per cent and the more growth-oriented funds down as much as 10 per cent.

If we went on short-term performance alone, you'd be hard pressed to find a fund that was performing.

But if you take the view that super is a long-term investment - and it's long-term performance that counts - the picture is much rosier. Over the past five years balanced funds have brought in average annual returns of 11 per cent, and growth funds closer to 12 per cent. Over the 35 years to June 2007, the Superannuation Minister, Nick Sherry, told superannuation researchers this week, super funds have delivered average annual returns of about 5 percentage points above inflation. That's a decent return in most people's books.

You can't blame investors for thinking short term. As Sherry pointed out to the Herald last week, super funds have been crowing about their short-term performance for the past four years. If the people entrusted with our retirement savings can't pay more than lip service to the long term, it's a bit rich to expect investors to do so.

But focusing on those short-term results, particularly when they're bad, can blind us to the real decisions we should be making about our super and super funds.

One of the reasons this year's losses will be so widespread is that the bulk of Australians - around 90 per cent - remain with their super fund's default option, generally a balanced or growth portfolio. This isn't a bad option. Most trustees choose it as the default because it represents a good long term trade-off between risk and reward. But a substantial proportion of investors haven't taken the time to understand the default option or to ask whether it is right for them.

If this year's losses prompt those investors to take a closer look at their super, to understand what option they're in and to ask whether they're happy with the long-term prospects, that's a plus. But the danger is that the losses will prompt a knee-jerk move to more conservative options, such as capital stable or cash.

Andrew Boal, the managing director of the super consultancy Watson Wyatt, says years when these safe options outperform are not unusual. Over the past 20 years, there have been seven years where the conservative option outperformed the growth option of the average super fund.

But you're giving up return for that safety. Over 20 years, Boal says the typical balanced growth option returned 10.3 per cent a year while the conservative or capital stable option returned 8.7 per cent.

That might not seem a lot of return to give up in exchange for being better able to sleep at night. But over the long term, even a small difference in return can make a big difference to your retirement.

By switching after a fall, you're locking in your losses and reducing your exposure to growth when the recovery eventually comes.

The unfortunate truth is that no one knows when the recovery will come - or how much further your fund will fall between now and then. But there are aspects of your super that you can control. Taking a long-term decision on how you want your money invested is a good start. As is reviewing your fund's longer-term performance and asking whether it delivers what it sets out to do.

Another variable that you can control is costs. It is often overlooked that a small difference in costs can also make a big difference to your retirement benefit.

The Australian Securities and Investments Commission's super calculator shows that over a 40-year working life, someone earning $58,000 and receiving only compulsory super would be more than $15,000 better off in a fund with annual fees of 1 per cent versus 1.2 per cent.

Fees are not everything, and it may be worth paying a bit more for a fund that gives you a better deal on insurance, better investment options both now and when you retire, and better service. But it makes more sense to judge your fund on long-term performance and whether it's value for money than focusing on short-term losses alone.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home