Stop making these SMSF mistakes
A veteran advisor since 1982 breaks down the ten most common mistakes SMSF investors make – and the one that matters most for retirement.
I have been a professional advisor in the stock market since 1982. For half of that time, I’ve been speaking to professional investors, to fund managers, and for the other half, I’ve been talking to people like you – self-managed super fund investors trying to look after their own money.
I can tell you the difference between professionals and you, and that is professionals have made all the mistakes already and don’t make them anymore. But when you sit down in front of your super fund, you’ve never made a mistake, and you’re about to make a whole load of them. I’m going to tell you the ten most common mistakes that self-managed super fund investors make, and at the end there is one really important mistake that everybody has to know – and your retirement will be a lot better for it.
Playing it too safe and sticking with the same stocks
Mistake number one is being too cautious. If you look at the average self-managed super fund cash balance, it’s somewhere around 30%. Most fund managers are running at 5%, they might get to 20% in extreme circumstances. But the point being that if you’ve got a nest egg – say you had a million-dollar nest egg, you’re expecting a 10% return – if you only invest half of it, you’ve got to make twice as much to get to your goals. That is cash, not investment. If you’re going to hit your goals, you can’t be too cautious.
Mistake number two, and this is something every stockbroker and financial advisor will tell you – when people have been looking after their own super, they turn up with the same portfolio. We actually call it “the portfolio.” It’s where an investor has gone to the top 50 stocks and crossed out any company that they don’t understand or can’t spell – which is why everybody still holds CSL (ASX: CSL), BHP Group (ASX: BHP) and Rio Tinto (ASX: RIO). You end up holding all the banks, Telstra (ASX: TLS), Woolworths (ASX: WOW), Wesfarmers (ASX: WES), Coles (ASX: COL), Fortescue (ASX: FMG), Aristocrat Leisure (ASX: ALL), Transurban Group (ASX: TCL). It’s such an obvious portfolio. There’s nothing wrong with the top 20 stocks in Australia. But why are you bothering with all the admin, all those different holdings, when you could just hold a market exposure that will give you the same return in one exchange-traded fund, or indeed sitting in an industry super fund.
Chasing yield and staying parochial
Mistake number three is chasing income or chasing yield. Two parts to this. The yield trap – this is where people buy stocks that have big yields because they’re going to pay a special dividend or pay out more than they’re earning. We’ve got a saying: any stock that yields more than 10% doesn’t, because either the forecasts are wrong and they’re not going to pay it, or what usually happens if there’s one big dividend is the stock, on the day it goes ex-dividend, drops by more than it should because everybody’s selling – because everyone was holding it for the dividend. So there’s the yield trap to start with. High yield does not mean it’s a good income stock.
The second thing is that if you invest for income, you will corral your money into low-growth stocks with no growth options, which is why they’ve got big dividend payouts. This is why the banks are fabulous stocks – sticking to their knitting, no growth options, paying the money back as dividends. Nothing wrong with that, fabulous stocks if you want income. But if you’re in accumulation phase, you’re trying to grow your nest egg. If you focus on income, you’re going to be focusing on the low-growth stocks and your nest egg is unlikely to grow. There are some fabulous income stocks – if you’re a wealthy retiree looking for income, nothing wrong with the major banks, they’re probably the best income stocks in the world. But if you’re trying to grow your nest egg, income is not the place to be. Don’t chase yield if you are looking to grow your money.
Next mistake – investing only in Australia. This might sound like a stupid thing to say, but in a world in which exchange-traded funds allow you to click a button and buy the S&P 500 or the Magnificent Seven in the same way that you can buy Commonwealth Bank (ASX: CBA) or BHP, why aren’t you doing that? There is so much more growth available to you outside of Australia. We have outperformed the Australian indices in the last 18 months playing the big tech trade, the AI trade, networking, semiconductors. None of that is available to you in Australia. Australia is essentially a backwater market. With exchange-traded funds, you’ve got the option to invest anywhere in the world. Why don’t you use it?
Ignoring the tools that actually help you trade
Next mistake – falling for the idea that charts are irrelevant and fundamental analysis is all that matters. Quoting Warren Buffett and Benjamin Graham – that’s just one way to invest. Fabulous research, but it only tells you one thing: how safe, how reliable the company is. It doesn’t tell you whether to buy or sell. Meanwhile, on the other side, you have people who will just ignore fundamentals and only trade on charts. I can tell you, if you only trade on charts, you’re going to treat BHP the same way as you do CBA. BHP is a trading stock, it’s cyclical, it goes up and down a lot. CBA is an income stock. If you only look at a chart, you’re going to see them in the same vein without making the distinction between one being an income stock that’s very safe and the other being a cyclical stock that has moments you need to trade. You can’t just look at charts, you can’t just do fundamentals. Use all the tools available to you.
Next mistake is a fairly new one – assuming exchange-traded funds are safe, assuming they’re all similar. They’re very, very different. Yes, they’ve become very popular. But I was playing golf with someone recently and they said, “Oh, I think I’m going to change my approach, I’m going to invest in ETFs.” Which one? They’re not all the same. ETFs are just as complicated as shares. They are not by their nature different. Don’t just invest in exchange-traded funds – you have to research them as well. Assuming all ETFs are safe because they’re exchange-traded funds is wrong. Big mistake.
Cyclical stocks, tips, and trading too much
Next mistake – thinking you can be long-term with cyclical sectors. I think you probably can be long-term with some of the banks. They’re too big to fail, they’ve got fabulous businesses, they’ve got very little competition, they’re ingrained in the Australian psyche. But I heard somebody the other day saying, “I think BHP is a buy for the next two years.” Things change. Resources, which is a fabulous sector – and it’s fabulous that Australians are comfortable with resources, because there is an enormous amount of money to be made – but be aware, they are cyclical. These are not buy and hold stocks. 25% of our market is in the resources sector and people treat them as investments. They’re not. You can’t trade them beyond their commodity cycle. What’s the commodity cycle? Just ask anybody who’s ever bought a lithium stock. It is not a forever sector, but it’s a sector absolutely dripping in opportunity. If you can time the sector, time the stocks.
Next one – and this doesn’t really need an introduction – buying stocks on tips. You will find at dinner parties, amongst your friends, if it turns to the stock market, you will hear people tell you about stocks they made money in. This may appear as a tip. It will also probably be done with a knowing nod or a glance or in a whisper that adds absolutely zero credibility to a tip. Most tips are stocks other people are holding. One of the golden rules of investing is buy it and then tell everybody else about it. If you get a tip, nod, wave, or go and have a look at the stock and make your own mind up – but never buy something because somebody told you to buy it. The likelihood is it’s already gone up, they’ve made money, they were just bragging and you think it’s something clever. Don’t buy stocks on tips, not without doing a lot of research anyway and taking responsibility for the tip yourself.
Next mistake is trading too much. This might sound silly. I know there are day traders out there who are probably successful, but let me tell you, day trading is an all-day job. If I made 100 grand a year day trading, I’d see it as a success. But the reality is I could have gone and had a job with a lot less stress and earned more money than 100 grand. It’s a lot of work. I have never seen anybody go anywhere in the long term being short-term. That doesn’t even apply to just the stock market, it applies to life. If you plan your future by looking at the end of your nose, you’ll never get to the horizon. Short-term traders never last long-term. Don’t even bother to start being a short-term trader. If you find yourself doing it, it’s akin to gambling. It might be fun, but it’s probably going to cost you money and you’re not going to get anywhere. Put it this way – if my spouse was looking after my super fund and they were turning up at dinner every night going, “Oh, had a win today,” I’d be thinking this person should not be running my money. You need a more sensible approach to investment that doesn’t involve trading short-term.
The mistake that matters most for your retirement
The next mistake is having faith. We used to have a brother-in-law who got into broking, and he was sat down with a mentor next to him who said, “Don’t touch any buttons, come out for a coffee at 10:00, I’ll tell you how to do broking.” And what he told him was that what you’ve got to do when you first arrive in broking is find a company whose share price is less than a cent, that’s got half an idea, buy millions of shares and spend the rest of your career marketing it. So he did this – he found a stock, one-sixth of a cent. Every event we went to, be it a family function or a Christmas function, he would be there talking this stock. “Have you heard of so-and-so? Have you heard of so-and-so?” We used to call him the zombie, and it was always the same stock. And wow, it went from one-sixth of a cent to 20 cents. He had over a million dollars from putting in just a few grand, and it was fabulous. But one lesson – don’t develop faith, because he still held it when it went to zero. Stay objective, watch the price – don’t believe the price. When it starts going down, think about doing something about it.
Just the last one left, and the most important – and this is really targeted at younger people. Don’t ignore superannuation. We are blessed with this tax-efficient vehicle, it is the envy of the world, it is our superannuation asset. People like myself, baby boomers, we upset the younger generation because we own houses that we paid 200 grand for that are now worth $2 million. But there is one thing we missed out on, and that is a 30–40 year run on superannuation. If you are a younger person, you should take this seriously, because super will put you in a very good position in retirement. If you respect super at a young age, your retirement will be sorted. On current settings, you’re allowed $3 million in there. If I earned a 10% return, that’s 300 grand. I don’t spend 300 grand, so it would be growing my nest egg at that size. Get your money into super. It’s a great tax break, it’s an Australian gift – use it.
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