Barefoot Investor: Should you switch your Super fund?

SCOTT Pape tackles the issue of whether to go for a managed fund or a low-fee indexed fund, and why you should let your kids watch you make smart money decisions, like cutting up credit cards, saving money, and opening zero-fee bank accounts.

SCOTT Pape tackles the issue of whether to go for a managed fund or a low-fee indexed fund, and why you should let your kids watch you make smart money decisions, like cutting up credit cards, saving money, and opening zero-fee bank accounts.

This week he’s decided to break with a decade-long tradition and do a longer form Q&A.

SHOULD I SWITCH MY SUPER FUND?

CINDY ASKS: I really need your help please. I read your book and realised that my husband’s super was being ripped off by AMP with high fees and inappropriate insurance costs. We switched to the index fund you wrote about in your book, and it has been a disaster — it is down to $87,000 and it was at $90,000 before we switched. I’m really worried as he’s 54. Can you please advise what other funds we should investigate and change to?

BAREFOOT REPLIES: So you want to know which super fund will perform better in the future. I’ll answer that for you in a moment (with statistics!).

However, first I want to answer the question behind your question:

“The share market is freaking me out! How do I avoid losing money?”

This one is easily solved — you could transfer your super to a cash or fixed interest option, and you’ll never have to worry about the share market again.

However, you will replace that risk with the biggest risk of all: inflation eating away your purchasing power.

Case in point: in the 1970s a litre of milk cost 30 cents and a loaf of bread 24 cents. If you’d kept your money in the ‘safety’ of cash since the 70s, your money today would buy you a lot less stuff.

The bottom line is this: the future is going to be expensive, and you need your money to outrun inflation, and historically the best way to do that is to brave the share market and invest in stocks.

Okay, so now let’s get to your actual question: how do you choose a fund that will perform better in the future?

Thankfully, there’s a scoreboard.

Barefoot suggests your super needs to account for inflation.

Ratings agency Standard and Poor’s (S & P) has tracked over one thousand managed funds (786 Aussie share funds, 378 international share funds), and ranked them against a simple, low-fee index fund over a 15-year period. (An index fund simply follows the market by automatically investing in, say, the top 200 companies on the market.)

The results are staggering:

Almost nine in ten (87 per cent) international share funds have failed to beat a simple low-cost index fund.

Almost eight in ten (77 per cent) Aussie share funds have underperformed a simple low-cost index fund.

Why do the pros lose so consistently?

It’s pretty simple really, the more the fund manager takes, the less you make.

MORE BAREFOOT INVESTOR

NOT ALL FINANCIAL PLANNERS ARE CREATED EQUAL

WHY YOU SHOULDN’T FIX YOUR INTEREST RATE RIGHT NOW

HOW BAREFOOT QUADRUPLED HIS MONEY

Yet you still may be thinking, ‘Sure, but what about switching and picking those few funds that outperform?’

Well, the S & P research has found that today’s best performing fund is more likely to become one of the worst performers in a subsequent period than it is to stay on top (in other words, today’s winner is tomorrow’s dog), suggesting there’s more luck than skill in investing.

So, the logical argument would be to invest in that simple low-cost index fund, right?

Well, that’s exactly what the world’s greatest investor, Warren Buffett advises.

When Buffett dies, he’s requested that his entire estate be invested, on behalf of his wife, as follows: 10% into short-term government bonds, and 90% into an ultra low-fee S & P 500 index fund, which automatically tracks the 500 largest companies in America.

That’s it!

So, the cheapest fund in the country, if not the world, is the Hostplus Indexed Balanced fund. It charges around $90 for every $100k invested (a figure that has gone up recently by a ‘sliver’ because of ASIC industry regulations on how all funds classify their indirect costs).

Anyway, it invests as follows:

35 per cent in 200 of the largest businesses in Australia — like the banks, BHP, Rio, Telstra, Woolies and CSL.

40 per cent in 1,582 of the world’s largest businesses — like Apple, Facebook, Amazon, Nike and Nestlé (and the portfolio is partly hedged to protect against currency fluctuations).

15 per cent in fixed interest.

10 per cent is in cash.

That’s better diversification than Mrs Buffett will get!

Barefoot shares his super fun scorecard - research that compares thousands of managed funds against low-fee indexed funds.

Yes, you say, but what about the investment performance?

Well, here’s the really interesting thing: ten years ago Buffett put his money where his mouth was.

He famously made a ‘million-dollar bet’ that his basic ultra-low cost index fund would outperform the most elite hand-picked hedge funds over the next decade. These hedge funds were not only run by the sharpest investors on Wall Street, but they were able to invest in whatever they wanted: sophisticated private equity deals, complicated derivatives, gold, stocks, property, infrastructure, bitcoin, and they could invest anywhere in the world they thought was hot to trot.

Guess what happened?

In the first year of the bet, Buffett’s index fund was down significantly against the hedge funds, and it looked like he’d made a terrible mistake.

The index fund dropped a massive 37 per cent in the first year, while the hedge funds were down only 23 per cent.

So what did Buffett do to fix it?

Nothing.

Guess what happened after 10 years?

The hedge funds on average were up 36 per cent over the decade. Buffett’s simple low cost index fund was up … 125 per cent!

So before you switch to another fund (or take an adviser’s recommendation), I’d suggest you focus on the only two things you can control: the percentage of your super you have in the share market, and the fees you pay each year.

Personally I’ll remain invested in the simple, ultra-low fee, globally diversified, indexed balanced fund.

Yet I’ll leave the last word of advice to Buffett, who at 87, is old enough and rich enough to speak the truth:

“Just remember, the person you’re talking to ... your fees are their income.”

Money education should come from the parents, says Scott Pape.

CENTS IN MONEY LESSONS

I hate to break this to you, but 36 per cent of your friends are financial train wrecks.

Well, statistically anyway.

The ANZ released its Financial Wellbeing Report last week, and it showed that more than a third of us Aussies have either got our arse out of our strides (13 per cent) or are ‘yeah, nah’ when it comes to money (23 per cent).

Pretty depressing, right?

That means that seven million Aussies are effectively providing financial target-practice for the credit cartel — like Nimble, the ironic hipster-bunny. (The only ironic thing about Nimble is that they chose an apt mascot: vermin.)

Yet if there’s one thing these studies show, it’s that history repeats.

A 2003 study by ASIC (the Australian Securities and Investments Commission) found that the most financially illiterate people were recent school leavers, aged 18 to 24.

A quick count on all my fingers and toes shows that these financial numbskulls are now aged 33 to 39.

Strewth … that’s us!

We’ve now got kids of our own. And even though we’ve graduated from goon to grigio, many of us are no smarter about money than we were 15 years ago.

So what can we parents do to stop the cycle repeating, so our kids don’t end up taking our turn in the line?

Actually, quite a lot. In fact, I’m writing a book about it.

The ANZ research found that there were two critical factors for financial wellbeing: self-belief, and having the confidence to make everyday financial decisions.

That means one of your most important jobs as a parent is to build your kids’ financial confidence.

Schools won’t teach it.

And the CBA Dollarmites program is a manipulative marketing trap.

You need to do it.

So, over the dinner table with your kids, let them watch you make some smart money decisions, like cutting up credit cards, saving money, and opening zero-fee bank accounts.

Who knows, it may just boost your confidence too!

Tread Your Own Path!

If you have a burning money question, or you want to win a fight with your hubby, go to barefootinvestor.com or tweet #askbarefoot.

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 Barefoot Investor: Should you switch your Super fund?