For a $1.6 trillion industry, superannuation scarcely got a mention in the election campaign, though the final moments of the Rooty Hill debate between Kevin Rudd and Tony Abbott at least saw some discussion about self- managed super funds.
A woman questioner highlighted the yawning gap between the expectations of some do it yourself investors and the reality of superannuation as a tax-advantaged system of saving for retirement.
Basically, she wanted much earlier access to some of the savings – for young people’s first home or for older members’ aged care. In addition, she seemed to think that the diversified portfolios run by institutional super funds didn’t suit many Australians, who would prefer to invest in property instead of volatile listed securities.
The sole purpose test
SMSF investors are entitled to take control of their own investment decisions – that’s why they established their own funds – but the Rooty Hill views are a reminder that investors need to remain within the existing legal framework and also need a sensible investment approach.
So, perhaps SMSF trustees need to run a checklist in the interests of trouble-free investing and retirement.
First, it’s not a simple choice between shares or property. It’s natural to favour the assets you know best, but investors should avoid a single-minded concentration on any one asset. Investing for the long-term isn’t about backing the red or black ball; your retirement income shouldn’t rely on a 50/50 bet.
In any case, shares and property are simply two different types of equity and most long-term studies show there is only a marginal difference between investment returns from property and shares. Anyone who tries to tell you otherwise is giving you a short-term “sell” for business: rely on long-term results (after allowing for tax) and not on your own gut feeling or someone else’s sales-driven bias.
It’s worth remembering that the government only relatively recently allowed borrowing to buy property within an SMSF. There are rules to obey and, despite the temptation to flirt with them, the potential consequences of transgressing are punishing.
Eggs and baskets
Second, there’s such a thing as diversification of investments. There is always risk in investing, but a spread of investments – either within an asset class by holding several different shares – or a spread of different assets, is the only known way to reduce risk to manageable levels.
The share market can go down as well as rise and, despite some people’s fond hopes, the same applies to property. Property investment also may carry an interest rate risk, especially when rates are at historic lows and when regulators are starting to worry about banks’ lending policies.
A portfolio asset allocation plan might seem dull stuff compared to the buzz from picking individual stocks, but most studies suggest that it’s the asset mix that is responsible for most of a portfolio’s gains. SMSF investors need to opt for the “dull” approach for most of their assets; if you need the excitement of punting some stocks, create a separate trading portfolio (and limit it to a single digit percentage of total assets).
Third, remember that timing is everything. While you are running an accumulation fund, this mainly applies to buying and selling investments. But when your SMSF eventually becomes pension paying, timing becomes more critical. This is when liquidity becomes the main concern.
Before reaching pension stage, your fund needs a major health check. Paying interest on loans no longer seems sensible and the yield from investments becomes critical to avoid exhausting funds by dipping into capital.
Liquidity management becomes vital and big single investments like a property can be a challenge. Just as vital is managing against inflation. Shares can do this but suffer from volatile asset prices. Bonds can’t unless they are inflation-linked and our system hasn’t developed useable alternative investments for the retail investor.
Finally, the super system is a hostage to politics and legislation. While the Coalition promised no detrimental changes to super in its first term, one conclusion from the Rooty Hill debate is that Tony Abbott showed no enthusiasm about giving early access to super. His unpopular but orthodox view was that people can’t have both early access to their savings and still expect super’s tax concessions.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Drop dividend stocks? Never! [1]
- Paul Rickard: New IPO – Australian Industrial REIT [2]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [3]
- James Dunn: Three small-caps to keep for three years [4]
- Penny Pryor: Sydney property market still rising [5]
- Margaret Lomas: Don’t get burnt by off-the-plan [6]