Two recent reports have focussed attention on the adequacy of the superannuation system in Australia to prepare Australians financially for their life in retirement.  The federal government's intergenerational report and Rice Warner Actuaries' Retirement Savings Gap report (840k PDF) both show the pending stresses on the nation if the current system is allowed to continue.

A lot of the focus has been on whether the 9% standard employer contribution level is enough.  This looks at the money going into the system.  Unfortunately not enough seems to be made of the flows out of the system, most importantly the fees being charged.

The average fee for managing superannuation is currently 1.2%.  Unfortunately many are being charged much more than this to maintain a superannuation account.  The mantra being applied by these higher cost funds is that the investor need not worry about the level of fees but rather the net return after fees which of course is correct.  Unfortunately what they forget to mention is that once we accumulate all investor returns the average return is the market return.  So if everyone gets the average gross market return the distinction between one investor and the next is the evel of fees paid to get that average return.

For this firm the preferred approach for superannuation account holders is to focus on the key determinant of investment returns - asset allocation - and then make sure you are getting your optimum asset allocation (given your risk preference) at the lowest cost.

If you can apply this approach over the life of a superannuation holding you can be confident that you will have a much better than average result in retirement.

Regards,
Scott Keefer

An article in Monday's edition of The Australian newspaper written by Geoffrey Newman highlighted the projected deficiency between the amount the average Australian will save for their retirement and the amount needed - Superannuation gap blows out by hundreds of billions.  The numbers are indeed sobering.

The article referred to a report conducted by Rice Warner which suggested that we needed to contribute 18-20 per cent of our incomes into retirement savings each year to allow for an adequate retirement income.

There is pressure on the governemnt to increase the 9% of income that compulsorily goes into superannuation each year.  Even if the government comes to the party some way it will still require some significant extra contributions by individuals to reach the necessary funds required for an adequate retirement.

So what are the alternatives?

We can rely on the government to look after us in our twilight years.  This, for most no matter what side of politics, seems to be taking a big risk.

Alternatively, we can start putting aside extra savings each year.  This does not mean that we need to pump these extra savings into superannuation.  There are other alternatives though maybe less tax effective provide a lot more of flexibility and some might say certainty compared to the superannuation system.

An easy way of looking at the benefits of this extra saving is using the magic 5% rule.  If you invest your assets prudently you should expect to be able to draw 5% of income from your savings each year while allowing the capital value of these assets to grow in line with inflation so that he $5 of income grows each year in line with the growth in the costs of goods and services.  This means that if you save an extra $100 this year that corresponds to an extra $5 of income per year for the rest of your life.

Now if you don't spend that income and rather reinvest it, after 10 years that $100 of savings will be able to generate $8.15 of income each year for the remainder of your life, after 20 years $13.25 and the numbers get more compelling the longer you are able to refrain from using the income.

It would be great if the government could step in to help build everyone's retirement savings for the future but most would agree we should not be relying on that to happen.  The more we can each afford to save each year will definietly help towards a much more comfortable existence later in life.

Regards,
Scott Keefer

A report published by Standard & Poors last month in the US looked at the issue of whether superior performance on the part of a fund manager persists.  This is a pretty important topic because many investors of active managed funds tend to look at past performance as a guide to whether a particular fund or manager will do well into the future.

One piece of research evidence used to guild our investment approach for clients places doubt on the issue of fund manager performance continuing.  The following is an extract from "Our Research Based Approach" brochure:

On Persistence in Mutual Fund Performance
The Journal of Finance
Mark M. Cahart
March 1997, Vol. LII, No. 1: 57-82

What the paper says: There is no evidence that choosing a managed fund that had outperformed in the past would provide above average returns into the future.

In the author's own words: "The results do not support the existence of skilled or informed mutual fund portfolio managers."

The research clearly showed that just because fund managers out performed in the past did not mean they would continue to do so.

Now some will say that this study was conducted more that 10 years ago and times have changed.  So its good that Stadard & Poors produce their regularly updated analysis into the topic.

In their latest publication - Do Past Mutual Fund Winners Repeat? - The S & P Persistence Scorecard the researchers make the following observations:

- Very few funds manage to consistently repeat top-half or top-quartile performance. Over the five years ending September 2009, only 4.27% large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds maintained a top-half ranking over the five consecutive 12-month periods. No large- or mid-cap funds, and only one small-cap fund maintained a top quartile anking over the same period.
- Screening out bottom quartile funds may be appropriate, however, since they have a very high probability of being merged or liquidated.

In layman's terms what they found was that just because a mutual fund (termed managed funds in Australia) out-performed previously does not mean it will continue to do so.  However, if a mutual fund under-performs badly in past periods it may be worth avoiding this fund as there is a high likelihood the fund won't exist in the future.

These are results from the US but as we see time after time the experience here in Australia tends to reflect the same results.

In conclusion, if you feel like using actively managed funds is the way to go in building your investment portfolio (not the recommended action of this firm) then be very careful using past performance as the key selection determinant.

A better approach in my opinion is to focus on the key determinant of future return - asset allocation - and build a portfolio that minimises risk through broad diversification.

Regards,
Scott Keefer

In his latest Eureka Report article, Scott Francis looks at where the Australian share market index might get to in 2010 and beyond.  Rather than make a forecast, Scott uses historical average returns to provide a guide.  Some interesting calculations and a good guide as to what a prudent investor should be expecting.

Please click on the following link to be taken to the article - Peaking ahead.

In his first article for 2010, Scott Francis looks at the often mentioned "January Effect".  He clearly shows that there is no predictive value to be gained from seeing what the market does in January.  Please take a look at Scott's article for the details - The January effect .

Scott Francis in his final Eureka Report article for 2010 reminds readers that history tells us that we tend to overreact to recent data.  He looks specifically at research conducted by Malmendier & Nagel which came to the following conclusions:

• Economic events, especially recent events, are more important than historical facts in influencing investment decisions.
• Investors who have experienced high stockmarket returns are more likely to participate in the stockmarket and own a greater proportion of shares in their portfolio.
• When actual returns are looked at, investors tend to destroy wealth by having too much of their assets in shares after good times, and too few after difficult periods. It's fair to say at the end of a shocking year, at the end of a worse-than-average decade, this evidence is likely to be reasonably relevant.

Scott concludes that we should not look at what has happened over the past year or even decade, rather we should stay in the market, thinking carefully about the asset classes you wish to expose your capital to, and about how you apportion your capital between asset classes.

Click on the link to be taken to Scott's article - Something you must know about 2010.

Most of us will not have the good fortune of winning the lotto nor coming into a significant amount of money through an inheritance.  The key to building wealth therefore will be about your ability to generate income, save a good part of that income and then invest those savings well.

Many of us put the cart before the horse by focusing on the investment stage of the process without realising that it is really the first two stages - generating income and saving - that will be the real determinants of our wealth in future years.

At the beginning of another year it is a great time to focus on the savings element of this equation to see whether you can wring out even more available funds from your take home pay / income.

"The Millionaire Next Door" written by Stanley & Danko in 1996 provide an interesting insight into the average millionaire in the US and how they have built their fortune.  They found that frugality was the foundation for building wealth and provided the following evidence of this frugality:

- self-made millionaires spend significantly less for suits
- the majority did not buy expensive shoes
- the majority did not buy expensive watches
- do not drive new cars and spend the same as the average person on car acquisitions

The book also provides some practical advice they found in their study of successful millionaires:

- Operate on an annual household budget
- Know how much your family spends each year for food, clothing and shelter
- Have daily, weekly, monthly, annual and lifetime goals
- Spend time planning your financial future

This discussion leads me to an interesting article I read in Sunday's Courier Mail - Losing billions in loose change .  the article quoted research that found "about $46 billion, or $2000 a person, was sitting in loose change jars, car consoles, piggy banks, shop tills, office floats and a corner of the purse and Ratecity said it was costing Australians as much as $2.5 billion in lost interest ... The average Australian could earn an extra $115 per year from interest if they deposited loose cash into a high-interest savings account"

It also found - "that Australians were losing $3.36 billion each year on comprehensive car insurance by not shopping around for a better deal."

So here are some practical examples of how we can all start to wring out some more savings this year - don't leave that spare change laying around and go back and check that you are getting a good deal with your car insurance.

There are many other strategies depending on your personal circumstances.  Three good sources of ideas to get you started are:

- Simple Savings - www.simplesavings.com.au
- Cheapskates - www.cheapskates.com.au
- Choice - www.choice.com.au

I hope this provides some useful tips for getting your savings plan off to an even better start in 2010.  Good luck and happing saving!

Regards,
Scott Keefer 

As this is my first entry for 2010, I would like to welcome you to the new year and hope that it is a peaceful and prosperous one for you.

For my first entry this year I have reflected on some simple yet profound reminders that we should all take with us through 2010.  After a great Christmas and New Year season I am getting back into the swing of reading other media coverage.  Over the weekend I came across an article on CNN Money - The 6 biggest investing mistakes - written by Burton Malkiel & Charles Ellis, both well known authors and scholars and co-authors of their latest book - "The Elements of Investing".

I am a firm believer that it is the mistakes that investors avoid rather than necessarily the good proactive decisions they make that will define the success or otherwise of their investment experience.

Malkiel & Ellis put forward these mistakes as the biggies:

1) Overconfidence
2) Following the herd - either in exuberance or distress
3) Timing the market
4) Assuming more control than you have
5) Paying too much in fees
6) Trusting stockbrokers

These mistakes are very much at the core of this firm's investment philosophy.  I know very well that I have little ability if any to predict the future for investment markets and have absolutely no control over this destiny.  What I and all investors do have control over is keeping a portfolio well diversified in low cost structures and investments that will position portfolios as effectively as possible (depending on tolerance to volatility in investment markets).

If you can follow a similar approach and avoid the 6 big mistakes you should be well ahead of the herd in the long run.

Have a great year.

Regards,
Scott Keefer

Last week ASIC launched their latest publication in the fight to educate investors against making significant financial mistakes.  The booklet is titled "Investing Between the Flags" and is referred to by ASIC as a free practical guide to investing for retail investors.

The guide is available as a free download from ASIC's FIDO website.

The guide sets out six steps to investing between the flags:

1. Understand some key things about yourself - think about your tolerance for risk and your goals and timeframes;
2. Understand some key things about investments - understand how different types of investments work, only invest in what you understand, be clear on the trade off between risk and return (e.g. the higher the rewards, the higher the risk);
3. Develop an investment plan - don't put all your eggs in one basket, spread your investments between different asset classes, managers and sectors so that you don't risk losing everything if an investment fails;
4. Decide how to invest - when it comes to investing, decide whether to take a - 'do-it-yourself' approach or get a professional to do it for you;
5. Implement the plan - do your homework, paying close attention to paperwork such as Statements of Advice and Product Disclosure Statements; and
6. Monitor your investments - rather than just adopting an 'invest and forget' approach, keep track of your investments over time.

A must read for those new to the investing game or as a refresher for the hardened investor.

Regards,
Scott

Scanning through the financial media today I cam across an article published in the AGE on the 9th by John Collett.  In the article Mr Collett outlines the 10 biggest things the global financial crisis has reminded investors.  I think he is right on the money.  The 10 items were:

1. There is no substitute for cash.

2. Simplicity should be favoured over complexity.

3. Nothing's guaranteed. Avoid capital-guaranteed products as they are hardly ever worth the cost of the capital guarantee.

4. Don't invest for tax.

5. Be ruthless on costs.