We're overdue for a stock market crash ...
Hi Scott,
We are well overdue for a stock market crash.
They happen, after all, on average every 10 years, and the last one (discounting the Covid-induced flash-crash) was 14 years ago.
And I still have PTSD from the GFC. People on the verge of retirement wrote to me in tears as they watched the value of their super dissolve in front of their eyes. They had no idea how much risk their super fund was taking … until the market crashed.
So now is a very good time to talk about what’s going on with your super fund. And a word of warning: it’s not good news if you’re in one of the large, top-performing funds …
New research from SuperRatings has found there is a “high risk at retirement” for many of the current top-returning super funds.
Huh?!
Aren’t we supposed to pick a super fund with high returns?
So what makes these funds so risky for older workers?
Well, it’s generally because they are invested more aggressively than the funds they’re competing against. That is, after all, how they get to the top of the performance tables: by taking more risks. There is no free lunch in finance, so tattoo this on your arm: “The higher the returns, the higher the risks!” Of course, taking on more risk is fine for a 17-year-old apprentice … but it’s not so sweet for a 64-year-old chef.
Still, that’s how most of our biggest super funds roll: they throw everyone – young and old – into a one-size-fits-all investment pot.
However, there is another type of super fund. It’s called a ‘target date super fund’.
These super funds invest based on your age. In simple terms, they automatically reduce the amount of riskier assets, like shares, in your portfolio as you get older and closer to retirement.
It works like this: our 17-year-old apprentice would start out aggressively invested in shares to build her nest egg, and then throughout her working life the fund would gradually – and automatically – become more conservative to protect her nest egg by beefing up her defensive assets like cash and fixed interest as she nears retirement.
It’s a simple, elegant and almost set-and-forget solution.
I say ‘almost’ because most of the current funds have their target date set at age 65, when you retire. (If I was a cynic I’d say it’s set at that age so you go see a financial planner.)
Enter Vanguard Investments.
Last month they received regulatory approval to launch a super fund. They're still fine tuning things, but later in the year they expect to launch a target date index super fund that will automatically adjust your portfolio all the way through to your 85th birthday.
The older I get, the more I value simplicity in my life – especially when it comes to investing.
I don’t like my returns being eroded by high fees, so I invest my super solely in low-cost index funds.
And I really like the idea of not having to meddle with my super as I get older.
So let’s hope the top-performing funds – who collectively invest for millions of Aussies both young and old – take heed of this new type of offering and build something even better for their members.
Tread Your Own Path!
Disclosure: I invest in some Vanguard index funds but not their super fund (because it doesn’t exist yet!).