An interpretation of the language surrounding higher investment returns (or lower) and forecasts for those returns.

Higher investment returns – or lower? From a financial adviser’s point of view, discussion on investment returns can be a fun diversion from the day-to-day paperwork and calculations, so here’s my attempt at putting together a layman’s interpretation of some rather frivolous news headlines.

Higher Investment Returns – ? or ! – ?

In a marvelous example of how time can get away from you, i first started this post in July 2015…

“Gosh Michael”, i hear you exclaim, “how can you leave such an important issue alone for a year..?!”. Well, the world has been far busier and less productive this past year than i would have liked. And so i have allowed an ever-increasing burden of paperwork and compliance and regulatory this or that to get in the way of maintaining my original intention for this site. While some of you may read my far more regular Facebook posts, there is the issue that quite a few people are Facebook-phobic, and so you are missing out on my regular missives. And the rights and wrongs and facts and opinions surrounding “higher investment returns” are so critical to understanding money that i really should spend some time updating this post and trying to add a little financial planner perspective for those who see value in such insights.

So…

I will restart this series of posts by going back to the original that was never finished. It is only slightly out of date, as even though the characters may have changed, the principles being discussed remain firmly intact.

To recap – this is the first of a series of posts that i will put together in an attempt to build some context into the idea of “higher investment returns”. Feel free to comment, criticise, critique or even ignore. But i’d clearly prefer a bit of interaction, and your thoughts and impressions are important to me.

 Last years’ half completed post starts here…

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Today’s post is sparked by an article* that headlines with “Hockey renews no super change pledge”, in which Treasurer Joe Hockey’s views on super investment returns are reflected in this quote:

Answering questions at the tax summit, the Treasurer said, “the fact is superannuation returns are at an extremely low level”.

In the same paper (Australian Financial Review, Thursday 1th July 2015, front page) is an article titled “Sharemarket’s best days over: fund managers”, in which a fund manager with very good returns over the past two years suggests “Strong markets will come again at some stage, but the big tailwind of ultra-loose global monetary policy pushing up all asset prices is now waning”.

These two articles are suggesting that super fund returns are low at the moment, and that investment returns from sharemarkets are going to be lower in the future than they currently are. Low returns for the past, the current AND the future? It’s a worrisome set of comments, and from people who hold high levels of authority for the average investor. After all, this is Australia’s Treasurer Joe Hockey, and Australia’s best performing fund manager over the last two years. With that level of potential for worry, I thought you may want a financial adviser’s viewpoint on statements such as these, and whether they are a valid interpretation that is useful to the average investor. So, here’s my (highly biased, highly opinionated) thoughts on ‘higher’ or ‘lower’ investment returns using references from these two articles.

As a hint for where we are headed and for those who like an executive summary…

Neither article is of use for average investors in determining current or future investment returns. Both the Treasurer and the fund manager are offering their own personal perspective only, and one so narrow that it is unlikely to impact the average investor in the way suggested. Benchmarks, time horizons and strategic position are all absent or out of context, leaving the articles and the remarks best viewed as interest pieces and part of the day-to-day noise of investments and the media.

That’s a quote from Michael (me), and potentially has no more validity than the articles themselves, so only continue if you are genuinely interested in interpreting ‘noise’ and gaining an idea or two on how to approach investment return issues.

Higher Investment Returns! – or lower?

The first requirement for any comparison is a benchmark that you can gauge your results against. “Higher than what?” should be your first question when confronted by any declaration of investments returns. In this specific case, we are dealing with two different areas of investment:

1. Superannuation fund returns
   • This will mean something different to each super fund member, as each person will have their money spread across different investments.
   • The bigger corporate and industry funds will have most members in their “default” investment option.
   • Retail funds will have member money spread across a wider range of investment options.
   • Members operating off the advice of a financial planner will have an individual mix of investments tailored to their personal preferences.
   • Self-managed super fund members will generally set their own investment options, and these can be materially different to all other types of super fund.
   • Super fund returns can be from cash, term deposits, fixed income investments such as government bonds, various forms of property, shares or trading strategies such as complex derivatives, futures, currency, long-short, and a host of others. These investments could be local or overseas or a mix of both, so there is an extremely wide range of possibilities for an ‘average’ benchmark to work out if returns are ‘higher’ or ‘lower’.
2. Australian sharemarket returns
   • Are we talking about the broad sharemarket returns as shown on tv and in the media every day through movements in the S&P/ASX 200 Index? In other words, the traditional ‘buy and hold’ approach to investment?
   • Are we talking about the potential for returns from ‘stockpicking’ – that is, buying and selling in the hope of doing better than the overall market, as measured by the index?

Investment return benchmarks

There are all sorts of technical benchmarks that are used in the financial world but for simplicity, i’m going to focus on just a couple of examples. This isn’t going to be a technical interpretation as i don’t have the time to wax lyrical for as long as that would take. I’m going to stick to easily found and highly-recognisable benchmarks that are available to most people who choose to look.

 

 

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And that is as far as that post went…

So now we have a starting point for the next post… we will talk about some of the benchmarks that can be used to determine whether a particular level of investment return is “high”…

Stay tuned folks, and let’s see if i can restart this line of thought for you…

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Notes, Disclaimers and Further Reading

• * article links are not provided, as you need to subscribe to the AFR to see them.