Your Questions Answered

1. Would it be possible to provide some updates on the timing as to when to consider changing one’s superannuation strategy?

In that just like outside super, when the market changes, it may warrant a reassessment of what to invest in.

I will list all the options available in my super fund Hostplus. I understand that super funds will differ in what holdings each investment option will contain, but I hope you can see how much you can help your members with the important decisions they need to make when the market moves, and what this means to their super choices.

Investment options:

• AUShares-Indexed

• Australian Shares

• Balanced

• Capital Stable

• Cash

• Conservative Balance

• DFI-Indexed

• DiversifiedFixedInt

• CPIplus

• Socially Responsible

• Indexed IntSh Hedged

• Indexed Int Shares

• Defensive

• Indexed Defensive

• Socially Responsible Investment (SRI) – Defensive

• Indexed High Growth

• High Growth

• Socially Responsible Investment (SRI) – High Growth

• Indexed Balanced

• Intshares-Emerging

• International Shares

• Shares Plus

Thanks for listing all those. They sure make it complicated for you. Point one: whether you choose SRI, ESG, Socially Responsible, or any other morally tinged asset class description is your choice, not my concern. These days, they all exist because they fear losing funds to other more ethical fund management offerings. But my job is to make money, not make moral judgements. So, strip those out. What they do is limit your opportunity to make money. Your choice. Meanwhile, all these funds are doing is offering you, under various generic titles, different percentages of different asset classes depending on how volatile those asset classes are. Ultimately, they are asking you to do the job of a financial planner and choose your own risk profile. That depends on you, your stage of life, ability to take risk, appetite to take risk, appetite for action, and all those other inputs that the poor advisers must try and assess if you go and see them. When you haven’t got an adviser, you have to do this yourself, and rather than give you one of two choices they give you 20. As far as I’m concerned, there are two asset classes I would be interested in and I would switch between. Maximum Aggressive and Cash. Most of these asset classes are ‘conservative’ to equity people. Aggressive for us is holding all your money in one lithium stock. Aggressive for an industry fund is 40% domestic equities, 40% international shares, and 20% fixed interest plus other things. That’s unaggressive to me. If I was a 20- to 60-year-old with an income and was trying to build a nest egg, I would sit at 100% of my chosen Maximum Aggressive asset allocation/description (high growth?) because it’s not that aggressive to me. It's still conservative. They are still trying not to get sued for doing something irresponsible. Like offering you a 100% allocation to technology stocks in the US (which would have made you a fortune if they had). Then, occasionally, when the stock market knocks Collingwood off the front page of the Herald Sun (or the back page) for the wrong reasons (talk of a crash), or I see a cruise missile land in New York, I would hit the ‘Cash’ setting on my industry fund’s mobile app (good development that). That’s what I would do. As for timing, you can follow that in the newsletter and make your mind up using our inputs. We make it very clear when we think the market has become dangerous, or when particular sectors should be avoided, and when we think things have become precipitous. Hit ‘Cash’. The intention of our Strategy Portfolio, as all our members know, is to “Time the Market” using ETFs. Contrary to the lemming-like brainwashing the industry has done to its clients (preferring a quiet life with no questions), it can be done. if you look at the performance of the Strategy Portfolio over the last five years, we have done it with a minimum of activity, volatility, risk, and cost. You can follow our timing moves in the newsletter. Caveat: if you are not comfortable with my Maximum Aggressive setting (high growth) as your default bull market asset allocation, choose something a bit less scary.

2. Last week you spoke about ETFs being active and passive, active involving human decision-making and passive being algorithms. How do I find which ETFs are active and which are passive? We have an SMSF, but we each have our own fund, and I am only new to managing mine.

Passive ETFs are those that represent something that requires no human judgment. So, an ETF that represents an index is the most obvious. The beauty of ETFs for Australians is that they give us access to asset classes we might not otherwise be able to access directly. For instance, the GOLD ETF (one of the first and most successful) allowed us to bet on the gold price. Prior to that, investing in gold literally required you to buy physical gold. So, the major value of ETFs is that they provide access to an inaccessible asset class, index, commodity, or international asset that we could not otherwise access without them. Where ETFs go wrong (for me), is when they are used by fund managers to provide access to their stock picking or theory or fad. As they say, by the time they create an ETF to provide access to a fad… it's over. The worst for me are the ETFs that purport to provide high yields from Australian stocks. There is only so much yield available from equities. Any fund or ETF promising an above-market yield MUST be paying you your capital back to achieve that yield, in which case the price of the ETF must be falling the more income they pay you. That's just one instance of a flawed ETF, because it has humans involved who are more interested in the marketing opportunities their ETF allows them than the returns they genuinely deliver to investors. Ultimately, there are two types of ETFs. Passive are those that provide access to an asset class/index/commodity/currency/sector without any changing the investment itself. You can identify passive ETFs, they are simple to understand, can be run by a computer algorithm and often have no employees. Then there are active ETFs, which are funds management in an ETF structure. They have human judgment involved and tend to have higher management fees. The two major Indian ETFs are a good example. NDIA is passive (simply replicates the index). Active IIND, on the other hand, gets humans involved in trying to pick stocks based on filters. I made a list of passive ETFs that I would consider a while back. Here it is.

3. What are the most common mistakes people make with their superannuation?

A big question. Let me give you a few:

• Not paying it any interest at all. Do you have your login?
• Not realising the importance of it in later life.
• Not respecting the forced saving element of super. This is why baby boomers are rich. We were forced to save to pay our mortgages. You can do the same with super. Save.
• Not paying in as much as possible. I know it sounds impossible, but at the moment you can put in $35,000 per year. What a fabulous investment. $35,000 compounding at 9% per annum (average stock market return) is $200,000. Do that for the next ten years and your retirement will be done in 30 years. If you can’t afford to take the risk on property or can’t get a mortgage, this is your next best thing, if not better. Pay more into super. And if you can’t afford that, ask your parents to do you a favour and pay money into your super for you. You’ll have far more luck persuading them to do that than you will persuading them to buy you a car. They will be much happier to contribute to your future than your spending. Maybe ask your grandparents as well.
• Setting up a self-managed super because your accountant or financial planner tells you to, not because you want to.
• Trading shares when you have no interest in the stock market, but you think you have to.
• Going from being a doctor, botanist, or football coach to amateur fund manager on the day you retire and thinking you’ll be OK.
• Going to see a financial adviser for a piece of structural advice and finding that after clicking three times on the DocuSign document they emailed you; they are managing your super for you in perpetuity.
• Seeing a financial expert recommended by someone else in your industry who tells you your best option is to forget buying a house (your suggestion) or investing in shares, and instead invest in a property off the plan being built on the Gold Coast (that they just happen to have access to). This happened to my 28-year-old doctor daughter who was recommended to this financial planner by her own industry body. Shocking.
• Taking control of your own super and gambling it away on the stock market.
• Letting your partner blow your future up by taking control, when they have no idea what they are doing.
• Having a partner who thinks they know what they are doing with your super when they don’t have experience or humility. If that study door is shut, you can guarantee they are f@#king it all up.
• Letting your partner manage your super and not having 100% transparency, understanding and dialogue about it.
• Taking out a subscription to a stock tipper and trading share tips. That’s not how super is done.
• Trading derivatives on a CFD platform without realising it’s not normal.
• Thinking you’re going to ‘write calls’ because you watched a video.
• Not subscribing to a sensible newsletter offering ‘Education by Osmosis’ like Marcus Today. I despair for some of the hands you can fall into.

I could keep going. The ways to stuff up your super are endless.

4. How can individuals nearing retirement optimise their superannuation for both growth and security?

A very general question. “Maximise for both growth and security” is a bit like asking for high returns with no risk. It doesn’t exist. You have to take more risk to invest in growth assets, it is in the nature of the world. You can’t have one without the other. You cannot have equity market returns by investing in fixed interest. So, you must make a choice. To be honest, this question wreaks of naïveté. That’s not an insult, it is commonplace, and I want to come into your living room and explain it all to you, because it suggests you have a low-risk profile but would like more money. It suggests you need to take a risk or lower your expectations. On that. A lesson. “Happiness is expectations met”. The best way to get happier is to lower your expectations. In other words, if you are uncomfortable taking risks then budget for a future based on lower returns.

5. How can younger investors leverage their superannuation for long-term financial success?

A broad question. But I do have an answer. The huge advantage that younger people have over people like myself (a 60-year-old baby boomer who lucked out on the property market over the last four decades) is the forced saving of the Australian Superannuation structure. Put money into super and you can’t get it out. Put it in, it is invested, and it then compounds. It's not spent. The huge advantage younger people have over baby boomers is a much longer run-up than we had (I only arrived in Australia in 1994). Super is your property market. And it doesn’t cost you anything. We paid interest to get into the property market (killing thousands of post-tax dollars that simply disappeared into the banks). You don’t have to pay that. Super doesn’t cost you. Super is your savings being invested and compounded – it puts you on the right side of the Eighth Wonder of the World. The money isn’t stolen from you by banks, by your mortgage, by you being on the wrong side of compounding (think about it) as we were. Paying as much into super as early as possible is a simply fabulous opportunity that we didn’t have. And let me give you a tip. You can pay $35,000 a year (at the moment). And if you can’t afford that, suck up to your grandparents and tell them you’ve put in as much as you can and ask if they can top it up. Pleeeease. You might just find them willing to invest in your future rather than giving you spending money that they won’t trust you to spend properly. But super. They’ll love that idea.

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6. How can individuals assess and adjust their superannuation risk profile to match their financial goals and comfort level?

That’s what financial planners are paid for. They assess you relative to all the other clients. Through their discovery process (asking you lots of questions), they get a feel for your net worth, your liabilities, your daily expenses, your expectations, and through subtle questions, how risk averse you are (or aren’t). Based on that, and their experience with many clients, they can tell you where you sit relative to others. For you to do that yourself, you must assess yourself the same way a financial planner does. Start with what income you would like on retirement. Then guess what annual return you are capable of achieving. Then work out how much capital you need in order to earn the income you want using the average annual return you think is realistic. Compare that to how much capital you’ve got. Now you know where you sit. You will find you are either well ahead of the eight ball or well behind it. It will also tell you whether you need to take risk to hit your goal, or whether you can stick it all in a term deposit and live happily ever after with no risk at all. It will also tell you whether you need to adjust your earnings expectations to something more realistic. Ultimately, the main variable is how long you have left to build the nest egg before you start eating it, and what return you can get on your capital before then. Having worked out what capital return you need, choosing the risk profile on an industry fund website becomes a lot more obvious. You can Google average returns from Australian asset classes (the stock market is 9% including income), compound them over the number of years you have left, and see how much capital you will have (in theory) in a few years’ time, and whether that’s enough. Just a tip. Best you sit down with your partner if you have one and do this together. There is nothing quite like communication between mutual dependents to sharpen up your financial disciplines!

7. What are the first steps in setting up a self-managed super fund (SMSF), and what are the ongoing responsibilities?

Your accountant will do it for you. If you haven’t got one, you’re going to need one with an SMSF, so get one. You can Google the ongoing responsibilities. It can include your involvement in investment decisions (or not) if you use a financial planner. I find the biggest pain of running an SMSF, instead of leaving it in some big fund, is having to find (lost) paperwork for the auditor, having to find reports and send them to the accountant, having to pay the accountant, and ultimately, signing that piece of paper which says that despite the fact I am paying an accountant, I am personally responsible for anything incorrect as far as the ATO is concerned. It’s a pain. No pain, no gain. It only really gets busy if you are making your own investment decisions. If you are doing it, then it is quite a skill set, and you can run into significant trouble either through your own incompetence or falling victim to some of the charlatans that hover around the space. I could name a few.

8. How does one assess the performance of their SMSF, and what benchmarks should they compare against?

There is only one measure. How much money is in there at the beginning of the year, and how much money is in there at the end. Nothing else matters. You can benchmark yourself to anything you like, you can even pretend to be a professional fund manager and benchmark yourself to the ASX 300 accumulation index. But it’s a bit pointless, because as an individual the only person you are responsible for is yourself and your other super fund beneficiaries (partner). If you’re anything like me, they are far more punishing if you underperform than any professional benchmarking system in existence. Your benchmark is your own. Making 10% per annum would be a fairly normal one. The trick, however, is to make sure that when it’s easy, when the market is booming and you hit your 10% benchmark in month three, you don’t spend more. As anyone who manages their own SMSF can tell you, there are good years and there are bad years. Your spending doesn’t go up and down with them. In the good years, tuck it away for the bad years. Sidenote: you can inappropriately benchmark, and you should be aware of that. In other words, you can’t invest in the conservative option on an industry fund and then compare it to the ASX 300 accumulation index. This is why 85% of fund managers underperform, because they have stupid benchmarks. You need to be aware of what asset classes you are invested in, and not beat yourself up if you are in income stocks if you don’t match the NASDAQ. Good communication with your partner about the appropriate benchmark for your chosen risk settings will save you from getting beaten up every year.

9. How can technology and financial software tools aid in the management of an SMSF?

Everyone making investment decisions on their own uses financial software tools. Subscriptions, portfolio monitoring software that includes tax reporting, charting software, Microsoft Excel. It’s one of the best bits of managing your own investments, having lots of software to play with, especially the ones with pretty pictures. If you don’t enjoy that sort of stuff and have zero computer skills, you probably should think about leaving your money in someone’s fund, not your own. It can’t be done without software these days.

10. What ongoing education or resources should individuals managing their own super engage with to stay ahead in a changing financial landscape?

Marcus Today – That’s all you’ll need. It takes time. We will educate you every day, and over time you will come to understand that it’s not that hard, you can control the risk, you can succeed, and it can be fun, entertaining, intellectual and rewarding. You probably think I’m lying. An 85% re-subscription rate tells me we are doing something right. Sign up for a free trial (click here) and find out if it works for you as well. Most of our members confidently manage their own investments and sleep soundly at night.   More about the author – Marcus Padley Marcus Padley is a highly-recognised stockbroker and business media personality. He founded the Marcus Today Stock Market Newsletter in 1998. Over the years, the business has built a community of like-minded investors who want to survive and thrive in the stock market. This is achieved through a combination of daily stock market education, ideas and activities.

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