Aussies are flat-earthers of the finance world when it comes to low-cost index funds
When it comes to low-cost index super funds, Aussies are like the flat-earthers of the finance world, openly questioning the validity. And the result is… last year Aussie super funds swiped $32 billion in fees, robbing future retirees of hundreds of thousands from their nest eggs, writes Barefoot Investor.
If you’re read my column for a while, you’ll know I bang on a lot about super fees.
Well today I’m going to tell you about a fund that has zero fees. As in a doughnut.
From the get-go of my career, I’ve advocated that people should invest in low-cost index funds for their super. (An index fund simply tracks the market by automatically investing in, say, the top 300 companies on the market).
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They are the cheapest way to invest and you purchase them via providers like Vanguard or as an investment option with your super.
And I have put it on record that I invest my super with Australia’s lowest cost index super fund, the Hostplus Index Balanced Fund.
This has opened me up to criticism that I’m biased towards Hostplus, yet my answer has always been the same:
I have no axe to grind, it’s simply about getting the lowest fees.
The long-term evidence is clear:
If you’re investing in anything other than a low-cost index fund, you’re likely to be a loser.
Ratings agency Standard and Poor’s (S&P) has tracked over one thousand managed funds and ranked them against a simple, low-fee index fund over a 15-year period.
Almost nine in ten (87 per cent) international share funds failed to beat a simple low-cost index fund. Almost eight in ten (77 per cent) Aussie share funds underperformed a simple low-cost index fund.
Faced with this overwhelming evidence, investors the world over have embraced index funds.
It’s not even debated any more … except here in Australia.
We’re like the flat-earthers of the finance world, openly questioning the ‘lower fees equal higher returns’ argument.
And the result is … last year Aussie super funds swiped $32 billion in fees, which over the long term robs future retirees of hundreds of thousands of dollars from their nest eggs.
ASIC has been trying to force fee-gouging super funds to give investors more transparency on the fees we pay, yet this week it was delayed again … thus far it’s dragged on for almost six years!
(No surprise there: Warren Buffett has sagely warned, “Remember, your fees are their income”.)
Anyway, of the thousands of super funds on offer, only a surprising few offer low-cost index funds, like Hostplus does. And I’ve always said that the day another low-cost index fund came onto the market, I’d let you know about it too.
Well, today is that day.
This week REST Super launched a suite of index funds that have 0 per cent fees:
• Australian Shares Index Fund — which tracks the 300 biggest companies in Australia (think the banks, Woolies, CSL, Sydney Airport).
• Overseas Shares Index Fund — which tracks 1,576 of the biggest companies in the world (think Amazon, Alphabet (Google), Berkshire Hathaway, and Toyota … though no tobacco stocks, which this fund has chosen to strip out). Dividends are reinvested in Aussie dollars.
• Balanced Index Fund, which consists of 30 per cent Australian shares, 45 per cent overseas shares, 20 per cent bonds and 5 per cent cash.
(Technical point: REST is using Macquarie Bank’s True Index funds, which use derivatives to manage their portfolio. REST say they have done their due diligence and are comfortable with the risk.)
Let’s be fair dinkum though … nothing is free (except my wife’s apricot chicken casserole … and that has its own risk profile).
So how can this fund be free?
The answer is, it’s not. The investment fee is zero, that’s true.
However, REST also charges an administration fee, which is $67.60 per year plus 0.10 per cent of your super balance per year.
Still, it’s very cheap.
Of course, before you switch to this (or any other) fund, I’d suggest you speak to a professional and get personal advice. Just make sure you’re speaking to an adviser who puts your interests first, and advocates low-cost investing.
Tread Your Own Path!
Q&A
BAILING OUT MY BOYFRIEND
MEL ASKS: Hi, I’m a huge fan! My boyfriend is currently working overseas, and we plan to ‘go Barefoot’ when he gets back so we can tackle our debts.
My accountant suggested we first pay off the personal loan my boyfriend got, which he consolidated his credit card debt into — a loan that was only possible with my name on it. The accountant suggested using my inheritance, which I currently have in our joint offset account.
Trouble is, my boyfriend now has another credit card and I worry I would be bailing him out again! What should I do?
BAREFOOT REPLIES: Your accountant is just looking at the digits: The interest on the personal loan is costing you more than the offset, so you could save money by extinguishing that debt.
And given you’ve already contracted an STD (Sexually Transmitted Debt) — that is, you’re now both jointly and severally liable for repaying the loan — it makes total sense financially.
However, if I were in your situation, I wouldn’t repay the loan.
(Actually, I wouldn’t have co-signed the personal loan in the first place, but I’m a little Judge Judy like that.)
First, because you don’t want to set up the expectation that you’ll reward his dumb behaviour. And second, because you’re already giving him a helping hand.
By keeping your inheritance parked in your joint offset account, you’re already effectively lowering your mortgage repayments, giving him a fantastic opportunity to ditch the credit card and domino his debts.
I’d sell it this way: this is an excellent way to show his commitment to both the Barefoot plan, and you!
MONEY DISAPPEARING INTO THIN AIR
COL ASKS: I like the ‘Barefoot approach’, but my sticking point in following your plan is an issue of trust.
I find it hard to just transfer money to an online account which seems to be in the air, like ‘iCloud’. It is not tangible, and I cannot see somebody face-to-face if something goes wrong.
Why is it a good idea to commit all my money to what seems like ‘the sky’.
BAREFOOT REPLIES: You have a very old school view, which I totally appreciate.
However, as the Royal Commission has highlighted, there are plenty of bank customers who got rogered because they walked into a branch and spoke to someone face-to-face!
Personally, I don’t fully trust any financial institution … instead, I put my faith in the Australian taxpayer.
The Government has guaranteed deposits up to $250,000 in authorised deposit-taking institutions (ADIs), like banks, credit unions, and online only banks without branches.
You can find the list of ADIs that are covered on the Australian Prudential Regulation Authority’s website (www.apra.gov.au), or, if you want to keep it analog, you can call them on 1300 55 88 49.
COULD WE LOSE ALL OUR MONEY?
MERRYN ASKS: My husband and I are working through your book, but we are stuck at the superannuation chapter.
We both work for the Queensland Government and have our super in the QSuper Lifetime Aspire fund.
The fee is 0.9 per cent, which is just above your recommended 0.85 per cent. QSuper feels ‘safe’.
If we changed to another fund, can we be sure we are guaranteed by the Government? Could we lose all our money?
BAREFOOT REPLIES: Let me clear this up: you are not guaranteed by the Government if you lose all your money in super. (That only happens with money you have in the bank — see the question above.)
Instead, your superannuation fund is a trust, and the trustees of the fund are legally obliged to act in your best interests (as the Royal Commission has shown, some do a better job of this than others).
QSuper appears to be doing a good job: they’re a not-for-profit industry fund that charges competitive fees, and they have a decent track record.
My advice would be to call up the fund and request to sit down with one of their advisers, and have them help you select the most appropriate asset mix within your current QSuper fund.
Why? Well, a Vanguard study showed that 90 per cent of your returns comes from the asset allocation you choose. Make that your focus.
TOP OF THE CLASS
KIM ASKS: I was indoctrinated into the ‘Barefoot cult’ around Easter this year, and it has changed my life.
I am a business studies teacher in a low socio-economic high school in Brisbane’s south and, since reading your book, have been going on about it to my class.
I kept on answering the students’ questions … until I decided to purchase a copy for each of them.
When I gave them the books, they high-fived each other and said “This is going to change our lives!”
I have cleaned out one Big W store and am making my way round the others. Thank you!
BAREFOOT REPLIES: Teenagers? High fiving each other, about something other than a student free day? You’re using the force, sister!
Without knowing it, you’ve just completed the money class I’m trialling in schools:
Step 1: Is to teach the teachers, so they can lift their own financial confidence. (It’d be pretty hard to talk to a bunch of kids about the dangers of credit cards when you have credit card debt yourself!)
Step 2: Is to teach the kids.
Step 3: Is to encourage the kids go home and share what they’ve learnt with their parents.
My motto is: if you help the kids, you help the parents. And if you help the parents, you change the nation. Thanks for your support!
If you have a burning money question, go to barefootinvestor.com and #askbarefoot.
The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need (HarperCollins) RRP $29.99. Available online now and in all good bookstores.
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.
Originally published as Aussies are flat-earthers of the finance world when it comes to low-cost index funds
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