When I look at people’s super fund investment portfolios, they generally fall into 1 of 3 categories:
There is one major property asset, possibly with some debt
The majority of the fund is invested in shares. The trustees have possibly held their shares through a fall 20-40% and are reluctant to sell at a loss, OR they figure the market can’t go much lower so they are trying to buy in at the bottom
The majority is sitting in the bank earning a steady but inadequate and declining 4% p.a.
So which is the best approach? Of course there is no right answer for everyone, but none of these is likely the right approach for most people.
If you are in category 1 – At least you are not overly exposed to the share market. However you do have a lack of diversification and liquidity in your fund which may or may not be appropriate for you, depending on your age, income, assets outside super and risk profile. There is no guarantee that property will increase in value, especially in the short-medium term.
If you are in category 2 – You are taking on significant risk. While you might think an ASX 200 (or All Ordinaries Index) of 4,000 sounds cheap because it is 40% below the market peak, there are numerous times in history when the market has fallen much further. In the Great Depression, the US market fell by 90% from peak to trough. It then took over 20 years to recover to its pre depression levels. And in Japan over the past 22 years the market has fallen by 75%, with no recovery in sight. With Europe on the brink, China slowing and most developed countries deleveraging (saving money to reduce debt rather than spending money to stimulate their economies), further significant falls in share prices are a strong possibility.
Putting your money in the bank seems like the only alternative. But is it really? Is a 4% interest rate from a bank account an adequate return? And what happens when the RBA reduces rates further? For example, the official interest rates in Europe, Japan and the USA are all around 1% or less. Australia could easily follow their lead if economic weakness continues. Markets are suggesting that interest rates will fall 1% in the next year, and further beyond that.
We are currently recommending a large allocation to corporate bonds. A corporate bond is effectively a loan to a company. Many of these companies are well known, safe businesses which can withstand a weak economy. Our clients are locking into a rate of around 6.5% for 6-7 years on average. These bonds are liquid, and can be sold at any time. This means you can access your money when the share market provides better value, and then ride the next wave up. The share market will provide great buying opportunities at some time in the next few years, but only to those people that still have capital to invest.
For a fund with $500,000 – by holding corporate bonds rather than bank deposits you can be $15,000-20,000 better off per annum. The bigger your fund, the bigger the benefit.
So how do you buy corporate bonds? Unfortunately you can’t buy them through a stockbroker. You need a relationship with a dedicated broker that deals in Corporate Bonds. Contact us at Lime Super and we can show you how to improve your returns without the risk of the sharemarket.
General advice warning
The contents of this article are general in nature and are not tailored to your personal circumstances. You should consult your financial adviser before acting on this information.