The world of the financial planner is generally seen through blocks of time measured of multiple years. That differs from most other outlooks, and is one of the least understood aspects of money and planning.

9 common mistakes about super

How can you misunderstand something like superannuation? Here’s a very short list of 9 common mistakes about super and how it works:

1. Super is an investment – NO, IT IS NOT!
   1. Super is a tax structure.
   2. “Super” does not define any investment at all!
   3. The tax structure of super can help alter the taxation outcomes of your retirement.
   4. The tax structure of super can help alter the Centrelink Aged Pension outcomes of your retirement.
   5. Super is generally an efficient structure in which to hold insurance cover.
   6. Decide on the value of super by deciding on these issues.
   7. Investment is your last consideration of the value of super.
2. Property outperforms super – NO, IT DOES NOT!
   1. Refer to point (1) above.
   2. You can own property in or out of super.
   3. The tax position is not likely to impact the price you pay to buy, the price you get to sell or the need to maintain the asset and find tenants. Super is just a tax position!
   4. Recent law changes (which i think are foolish) allow your super fund to borrow to buy properties, so even the gearing aspect of property is now available in super, reducing the validity of “property outperforms super” even further.
3. Price volatility is bad for me – NO, IT IS NOT!
   1. Be wary of allowing yourself to be labelled a “conservative investor” simply because we are 5 years in to a a major global bank crisis. Just because you don’t like price volatility, don’t assume that is must necessarily be bad for you.
   2. When you are in accumulation mode, you are looking to buy assets today for an eventual provision of income or the ability to sell in retirement (hopefully for more than your purchase price).
   3. You may be a conservative investor. Have you ever bought a property? Did you borrow to do so? If the answer to these questions is “yes” then how on earth can you be a conservative investor? Ask yourself whether you are viewing your super as something that it is not? For example, IF you achieve a completely stable return equal to the rate of inflation, how does that place you in retirement?
   4. Your objectives while accumulating assets prior to retirement is very different to your objective once you have retired. There are completely different cashflows involved, and a completely different mindset. The time either side of your retirement is especially messy. Try to focus on where you are today, and make decisions based on that outlook.
   5. Recent public declarations that “super funds have too many shares” is looking at the world of superannuation through a highly distorted lens. Read more of my past musings if you are uncertain why this may be the case.
   6. If price volatility makes you lose sleep then have a very long discussion with a financial planner about your likely cashflows through to your statistical expiry date. It is only AFTER you’ve spent time doing this that you should sleep comfortably because you are invested heavily into cash to avoid the volatility of growth assets in your super. Up until then, such blissful sleep is most likely based on the blissful sleep of ignorance rather than the blissful sleep of an informed mind. (Harsh words Michael, but feel free to debate that point).
4. Buy and Hold is dead. It’s a strategy for idiots – NO, IT IS NOT!
   1. IF buy and hold were dead then you should have sold your home in 2006, and waited to buy it back years later – but you didn’t did you? i remember making that exact same suggestion back in 2006 to people who subsequently complained that their super didn’t perform… The world of money misuses terms with subtle definitions. “Buy and hold is dead” is one of those misused terms.
   2. When it comes to super, “buy-and-hold” is a standard proposition. That is logical because of the way that most super money is invested.
      1. If you bought a parcel of shares, how often would you trade them? Once a year? Monthly? Weekly?
      2. If you bought and sold every day, you would be a “day-trader” and you would basically be speculating on short term price movements based on completely random inputs.
      3. A super fund share option would generally involve a mulitple set of managers operating a multiple set of strategies operating in multiple markets simultaneously. Each and every one of those managers will be turning over part of your portfolio constantly. It is not unusual for a share portfolio of an active manager to be completely turned over in a year. Would you be that active? And could you do so in a disciplined manner?
      4. Would you dynamically and tactically alter your holdings between property, cash and shares on a daily basis and still measure that against medium term outcome expectations?
      5. Buying and holding most managed funds is holding one of the most active strategies you can employ. It’s just that super funds aren’t good at explaining that fact.
      6. In the average super fund, if you are passively “buying and holding” it is highly likely that your super fund is doing exactly the opposite! So be wary of those peddling trading strategies telling you that buy and hold in super is dead.
5. The main benefit of super is tax deductions – NO, IT IS NOT!
   1. The main benefit of super is the lower ongoing tax rate from now through to retirement (generally 15% with the capacity to be a lot lower)
   2. In other words, it is the compounding value of a lower tax regime that can help.
   3. Another primary benefit is the ability to roll your super into a pension account, from which you can obtain a tax free income in retirement.
   4. Once in pension mode, you do not pay income or capital gains tax on the money in your pension account and you pay no tax on the money you receive in your hands **(there are exceptions)
   5. Your income from a pension account is treated concessionally by Centrelink – this is a major benefit of super, as your super money can eventually be put in to one of these pension accounts.
6. Super is all about my retirement date – NO, IT IS NOT!
   1. Your retirement date is nothing more than a day for a big celebration. It has a minimal value in the overall direction of your super.
   2. When you retire, you will generally want to use your super for an ongoing income. Therefore, directing everything in your planning at a precise retirement date is acting on a false beacon.
7. I’ll lose all my money if i buy a pension with my super and then die – NO, YOU WILL NOT!
   1. YOU decide exactly which type of pension your super money buys. You may decide on just taking the income or you may decide to take a large income or you may want to opt for one that pays you forever but doesn’t pay much to your estate. That’s completely up to you. 
8. My super fund has bad returns – NO, IT DOES NOT!
   1. Refer to point (1) above!
   2. Your investment selection in your super fund has bad returns!
   3. Your super fund does not have bad returns at all. It’s a tax structure, NOT an investment!
9. My super fund is doing badly. My last statement shows it – NO, IT DOES NOT!
   1. Your statement simply shows the returns for ridiculously fixed periods of time. That’s great if you are in cash and have no movement in capital value but it is completely misleading when dealing with the average “default” or “balanced” or “managed” or “growth” type of portfolio.
   2. As an example, if you were to have a super account completely in Australian shares (i’m just using this as an example) then your return on your annual statement would vary depending on which day it was calculated. Here’s a list of potential “annual returns/1 year return” figures from that sample portfolio…
      

      Measuring 12 month returns can be misleading. This is especially true of the average diversified superannuation account. Be careful when interpreting your annual statement annual return figures. They are unlikely to give you a full story.

OK. i’ve ranted enough. Even after years of information and public debate, superannuation remains a misunderstood investment vehicle. If you’re interested in what triggered that little outburst, it’s a series of supposedly authoritative articles in supposedly leading financial publications. When these commentators make statements into the void of public domain, they rarely consider just how those statements may be interpreted by the non-financial public (and if this week is anything to go by, the financial public as well!). Here’s just one…

Misunderstanding super time frames

This is a goodie. The Australian Financial Review (6 November 2012, p17) has an article “Telco to review super losses”. The point being made is that the defined benefit (ie, a super account that promises are particular end benefit) super fund for Telstra is showing as deficient to cover its full liabilities if they were all to be called up today. That’s straight-forward enough. However, what the article then shows is a table of the returns for the Telstra super against the average of other super funds for 1 year and 5 year periods. The misunderstanding here is with regards to the applicability of 1 and 5 year returns to a super fund that has liabilities that will extend for decades into the future. It’s never a good idea for returns to be low for too long, and no-one wants that as an outcome but there is a simple fact of investing at work here – there is NO WAY of guaranteeing long term returns sufficient for a defined benefit fund if all you do is put the money into cash. Therefore, the Telstra super will include  a mix of assets that the Trustees, actuaries and asset consultants believe will deliver the required return over the expected life of the fund. By definition, there will be periods of underperformance – both against relative benchmarks (such as other super funds) and definitive benchmarks (such as the cash rate). To expect otherwise is not just silly, it is completely contrary to the return expectations of the fund assets. It is a great idea for an article to highlight potential shortfalls in super funds. However, the idea that 1 or 5 year returns are of any use at all in interpreting that fact is a complete misunderstanding of the way that super and investments work. It’s a bit like looking back over the past 5 years and using that post global financial crisis period as your benchmark for considering returns for the next 30 years. It just doesn’t make sense. It may be the way that short-sighted marketing and sales techniques drive the investing public but it is completely wrong. There you go. My Friday rant. Enjoy your weekend! The Great Disclaimer Please remember that NOTHING on this site or in this post is to be taken as personal advice, even if it may seem that it is – it IS NOT! Personal advice can only be provided by a suitably qualified individual after appropriate research and investigation into your overall financial position, tolerance of risk, return requirement assumptions, investment knowledge and understanding in the light of current and expected legislative, economic and whatever else conditions that exist. Disclaimer about my examples Please keep in mind that i have simply used the specific examples above as a way of illustrating my points. i make no representation on the value or returns or assets or outcomes of the Telstra super, and the 12 month returns from shares are simply a representative basket that i have chosen to use owing to the difficulty of obtaining a fair comparison of rolling 12 month returns on a daily basis. For example, many funds only calculate pricing weekly or even monthly, so comparisons can be quite difficult. The example also overstates the likely variances, as it would be expected that a diversified portfolio would have a lower level of volatility (but not necessarily so) and that this would result in a lower dispersion of returns based on a given day.