While saving in super is an extremely long-term exercise, many of us focus on improving our immediate superannuation positions as the end of another financial year looms.

For those still in the workforce, year-end super planning typically includes thinking about whether to make extra contributions before the end of the financial year.  

Before making extra contributions by June 30, it is worth considering whether to take professional advice regarding such issues as the annual contributions caps and the possible consequences of exceeding those caps.

And it is worth considering taking advice about whether it is appropriate to make extra-large contributions within the caps given an individual’s personal circumstances, including the state of current retirement savings, age and years to planned retirement.

As the financial year draws to a close, many members making voluntary contributions will check how their contributions so far in 2014-15 measure against their concessional (before tax) and non-concessional caps (after-tax) contributions.

Significantly, compulsory contributions count towards the concessional contributions cap. (Concessional contributions comprise compulsory and salary-sacrificed contributions as well as personally-deductible contributions by eligible self-employed members.)

It is crucial not to leave super contributions until the last minute as this could lead to the amounts not being credited into your super account for the current financial year. This can possibly lead to not maximising contributions in one financial year and possibly to overshooting contribution caps in the following year.

As emphasised in the Australian Superannuation Handbook 2014-15, published by Thomson Reuters, the tax office considers a contribution by electronic transfer is not made until the amount is actually credited to a super fund’s bank account.

One of the end-of-financial year issues that increasing numbers of SMSF trustees are addressing with the ageing of the population is that if a fund doesn’t pay the minimum annual superannuation pension, assets backing the pension payment could lose their tax exemption. (The minimum pension payable ranges from 4 per cent to 14 per cent, depending upon age, of pension assets in a fund.)

Critically, year-end planning for super ideally include putting your superannuation affairs into order for the new financial year.

Super matters to think about for the 2015-16 financial year include whether to make higher salary-sacrificed contributions in the 12 months ahead. Under tax law, arrangements to salary-sacrifice super must be in place before the money is earned.

Another forward-thinking super matter is whether a fund member will become eligible for a transition-to-retirement pension sometime in 2015-16. Super fund assets backing the payment of a super pension are no longer subject to tax. (Fund members from age 55 are eligible for a transition-to-retirement pension even if still working.)

Many fund members no doubt treat the end of the financial year as a prompt to review their superannuation positions to maximise their opportunities before June 30, for the financial year ahead and for the very long term. There is much to think about.

Everyone knows that reaching a long-term goal appears less daunting if you break the bigger task down into smaller steps. Approaching investment in a similar way makes a lot of sense.

A typical novel contains anywhere from 60,000 to 100,000 words. If a writer were to sit at his desk and contemplate the task involved in pumping out that much material, he might feel overwhelmed by the challenge.

Instead, many writers of long-form fiction break down what appears to be a monumental job into smaller chunks. They may aim to write a thousand words a day or a chapter a week. And they may grant themselves a day off every week.

Ostensibly, someone working on that schedule could knock out a novel in 10 weeks. Of course, there’ll be days when the inspiration doesn’t flow or when there are unavoidable distractions. But there’ll also be days when the writer is hugely inspired and productive, so that he exceeds his target.

What matters to the writer is that he’s making progress toward a long-term goal made up of a lot of little wins (and the occasional loss). The long-form piece of fiction becomes in reality a lot of smaller stories and incidents.

An investor should think about returns in the same way. The long-term goal may be to secure the 8% or so annual return that the equity market has historically offered on average. The challenge is accepting that that return is not delivered every time.

There will be years where the risk of owning stocks shows up. Take 2008, for instance, when the Australian share market, as measured by the S&P/ASX 300 accumulation index, delivered a negative return of nearly 39%.

But there will also be years when the market delivers double-digit positive returns, as in 2004-07 and 2012-13.

Because no-one knows for sure when the market premium will show up, the investor, needs to stay in his seat. Like the writer, the smart investor is not focused on the daily, monthly or even yearly returns, but on his own long-term goal.

Dimensional’s Matrix Book shows how historical context can provide perspective for the investor distracted by short-term returns. In 1980, for instance, the S&P/ASX 300 delivered a return of nearly 50%. The following year, it fell by nearly 13% and by a similar amount again in 1982. In 1983, it snapped back by nearly 67%. Over the full 25-year period from 1980-2014, the market delivered an annualised return of 11.6%.

It’s the same story with other premiums such as from low relative price and small company stocks. The Matrix Book shows Dimensional’s Australia Core Equity index, which tilts to those dimensions, had negative returns in seven years of the 33-year period from 1982-2014. Over the whole period, though, it delivered a total annualised return of 12.5%.

Of course, an investor confronted with another year like 2008 might be tempted to get out of the market completely. But timing one’s exit point is tough. And even if you manage to get that right, you have to work out when to get back in again.

So an investor who quit the Australian Core Equity index in 2008 (when it fell 41.6%) may also have missed the rebound of 46.2% the following year.

A writer succeeds by maintaining discipline and working slowly and steadily with the end goal of the novel in mind, accepting that there will be setbacks on the way. An investor succeeds in exactly the same way.

Call it the Write Stuff.

The latest medium and long-term returns of the big balanced super funds provide a telling reminder about a powerful and straightforward investment strategy known as dollar cost averaging.

Dollar cost averaging simply involves investing the same amount of money over regular time periods – regardless of whether asset prices are up or down.

Many super fund members making regular compulsory and salary-sacrificed (or personally-deductible contributions if eligible) may not realise that they are practising a form of dollar cost averaging.

Dollar cost averaging means that investors with exposure to the sharemarket, for instance, buy more shares or units when prices are lower and fewer when prices are higher. Significantly, the strategy can reduce any temptation to follow the investment herd by trying to pick the best times to buy or sell.

Super fund researcher SuperRatings reports that the median large super fund with a balanced portfolio in the accumulation phase returned 13.1 per cent return over the 12 months to March 31. And the median fund returned an annualised 11.9 per cent over three years, 8.7 per cent over five years, 6 per cent over seven years (which, of course, captures the impact of the GFC) and 6.8 per cent over 10 years.

From the perspective of individual super fund members, these returns illustrate the benefits of regular contributions in different market conditions, a diversified portfolio, compounding returns and a disciplined, long-term focus.

The less-positive news about dollar cost averaging is that sometimes investors will buy into a market at higher prices; the good news, as discussed, is that investors will also buy at low points.

Nevertheless, the core benefit of dollar cost averaging is not so much the price paid for investments; it is the adherence to a disciplined, non-emotive approach to investing.

The spotlight has been firmly directed towards the high end of the superannuation market.

The release this week of the Opposition’s proposed policy changes to super focussed on high account balances and two key changes: a tax on earnings of super accounts in pension phase and a lowering of the threshold on the high income super charge from $300,000 to $250,000 a year.

However, according to the ALP’s policy announcement the tax on pensions would only affect about 60,000 super fund members – those with more than $1.5 million balances.

It is entirely reasonable that we have public policy debates on superannuation through the lenses of equity and sustainability particularly given our ageing population and the pressures on the federal government budgetary position.

The next election will ultimately pass judgement on the Labor proposals and the Government’s still-to-come alternative approach. Sadly these long-running policy debates bring along with it the fellow travellers of regulatory uncertainty and legislative risk – both of which can effectively undermine confidence in the entire system.

While the ALP proposal focusses on “How much is enough” at the high account balance end of the market the single biggest challenge facing the system is that far too many people still have far too little in super to fund anything like a comfortable, let alone generous retirement.

According to the Rice Warner Superannuation Market Projections 2014 the average account balance in pre-retirement phase currently sits around $84,800 and that is only projected to rise to $114,300 by 2019.

So for the vast bulk of working Australians the simple answer to “how much is enough” is that today’s super is not even close particularly when you factor in realistic life expectancies reaching into the high 80s, early 90s.

That is a perspective that hopefully will not be drowned out in the forthcoming debate.

The recent report of the Financial System Inquiry – which at least in part has fuelled the super debate with its finding that 10% of Australians receive 38% of the tax concessional benefits in super – recommended one fundamental change that perhaps holds the best hope yet for some bi-partisan approaches to super.

That is the recommendation to “seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system…”

This could perhaps be the most important recommendation to come out of the FSI in relation to superannuation and retirement savings. If agreement can be reached on the over-arching objectives then it would provide a firmer policy framework against which initiatives like changes to tax arrangements can both be assessed and understood.

 

Digital innovation has democratised access to financial information to the point where anyone with a smartphone, a few apps and real-time news and data feeds can be like a pro trader. But who wants to do that? And do you need to?

In the world of information flows, speed is barely an issue anymore. And the old hierarchies, where professionals with state of the art systems had priority access to breaking news, have been progressively dismantled.

For instance, a $500 smartphone with a 1.3 gigahertz processor is more than a thousand times faster than the Apollo guidance computer that sent astronauts to the moon nearly half a century ago. Its internal memory is 250,000 times bigger.

The upshot is that financial and other information comes at us faster and in greater volumes than ever. We no longer have to wait for the six o’clock TV news to know what happened in markets today. Our apps notify us in real time.

But amid this era of always-on news flow, the big question for most of us is not about our access to real-time information; it’s about whether we actually need to be so plugged in to have a successful investment experience.

Dealing with that question starts with reflecting how much of an investment “edge” you get by having access to information that is so freely available.

On that score, there’s an old concept in economics called the law of diminishing returns. It essentially says that adding more and more of one input, while keeping everything else constant, gives you progressively less bang for your buck.

At the industrial end of this technology arms race, you have the high frequency traders who spend a fortune on advanced communications infrastructure to try to take advantage of split second changes in millions of prices. On the evolutionary scale, these computer programs make smart phones look like ploughshares.

So against that background it’s not clear that adding the latest market-minder app to your iPhone is necessarily the path to investment success.

The second question to ask is what you are trying to achieve. Are you trying to “beat” the market by finding mistakes in prices and timing your entry and exit points? If so, and given the competition above, you might want to review your information budget.

The truth for most of us is that investment is not an end in itself, but a means to an end. We want to save for a house or put our children through school or look after aging parents or give ourselves a good chance of a comfortable retirement.

In this context, the most relevant information is about our own lives and circumstances. How much do we spend? How much can we save? What’s our risk appetite? What are our future needs? And how much of a cash buffer do we need?

This is the value an independent financial advisor can bring—not in trying to second-guess the market or using forecasts to gamble with your money—but in understanding the life situation of each person and what each of them needs.

Ultimately, markets are so competitive that we really are wasting our own precious resources by trying to game them. What most of us need is to secure the long-term capital market rates of return as efficiently as possible.

So our limited resource is not speed or access to information, but our own time. We only have a short window to live the lives we want. And that means we should start any investment plan with understanding ourselves.

That’s where the edge is.

No doubt, you have heard of the “sandwich generation” but what about the “dual-retirement phenomena”?

The greying of much of the population and the rapidly-expanding ranks of retirees are throwing up new challenges as well as new expressions to describe our changing lifestyles.

Members of the “sandwich generation” – typically in their forties, fifties or sixties – are still supporting their children, trying to save for own retirement yet also spending much time, and possibly money, helping care for their ageing parents.

In other words, they are “sandwiched” between the needs of their children and their parents – while attempting to look after their own interests.

According to a recent article in The New York Times – Two generations, retired and together – the “dual-retirement phenomena” occurs when two generations of the same family are in retirement.

There are, of course, similarities between these two intergenerational circumstances: A major cause of both is greater longevity and both can test family relationships – financially and emotionally.

Indeed, the “sandwich generation” and the “dual-retirement phenomena” summarise two of the countless social impacts of an ageing population, as broadly discussed in the 2015 intergenerational report.

Phyllis Moen, a sociological professor at the University of Minnesota, is quoted by The New York Times as saying that it is “historically unprecedented where you have older people and their still-older parents”. And families would have to “figure out those intergenerational relationships.”

Case studies in this article include a 99-year-old mother and her 71 year-old son, a retired data analyst, as well as a 62-year-old retired schoolteacher and her 88-year-old father.

In short, the younger retirees are dealing with both the challenges (and extra freedoms) of their own retirement while trying to care for the increasing needs of their very old and often frail parents.

It is worth revisiting a short article, Your investing life: Helping aging parents, published in late 2013 by Vanguard in the US. It suggests how adult children can help their ageing parents while not neglecting their own needs.

“If your parents are under financial constraints, you may want to tap into your retirement savings to help them,” Vanguard’s specialists write. “That’s an admirable instinct, but one with potential long-term financial consequences for you and your own children. Consider any such move carefully before you act.”

And perhaps try to talk to your ageing parent or parents about money while respecting their financial boundaries, the specialists add. Ideally, these conversations should cover such issues as whether they have enough money to meet their living expenses and whether any “unfortunate financial surprises” are on the horizon.

A practical way that adult children can assist is by ensuring that their ageing parents are receiving all of their government entitlements.

Individuals in the “sandwich generation” – who may also be experiencing or expect to experience the “dual-retirement phenomena” – may benefit from consulting a skilled financial planner about the best way to handle their inter-generational financial challenges.

Mountain peaks challenge the endurance, courage and skill of climbers. A celebration at reaching the top of a mountain – or perhaps more appropriately when you get safely back down – is both understandable and well-earned. But the sense of anticipation and celebration when a sharemarket index is within sight of or hits a new peak is a little harder to fathom.

The Australian market as measured by the S&P/ASX 200 index has been flirting with the 6000 barrier in recent weeks prompting considerable media speculation about when it might crack through this numerical tollgate.

The attention on the 6000 mark is understandable on one level – when the market does finally push above it that will mean it has gone above the high water mark set in January 2008 just before the storms of the global financial crisis hit.

New sharemarket highs are curious beasts. They seem to stir the animal spirits and bring out the cheer squads in a similar vein to the way a rising Australian dollar becomes a source of national pride.

Yet a record high on the sharemarket index is unambiguous in the sense it means prices have risen. So investors looking to invest more into the market are paying a higher price today. When was the last time you went shopping and felt good about paying more for something that you knew was cheaper a week ago?

So does it not seem curious that rising prices can actually make us feel positive about investing more into the sharemarket?

This should not be misconstrued as suggesting another GFC is imminent or prices are forecast to drop any time soon. Prices may well continue to rise for a considerable period of time although we know that the sharemarket is volatile and moves in cycles and we should expect negative years 1 in every 5.

Rather what it points to is the need for a disciplined, well-diversified approach to your entire portfolio – not just to your share portfolio.

Where record highs for market indexes may have a useful purpose is prompting a portfolio review and considering rebalancing the asset allocation to get back in step with your risk profile.

Rebalancing is a rational approach that is confronted by a significant emotional challenge. After a strongly rising sharemarket, rebalancing may mean selling down a portion of the well-performing share portfolio and buying into whatever the underperforming asset class is at the time.

Selling winners and (seemingly) buying losers can be a climb too far for many investors.

What value do you expect a financial adviser to add to your investment success? If you expect an adviser to create an investment portfolio that will consistently outperform the markets, you are likely to face disappointment.

It is a reality that an adviser will almost inevitably struggle to add value for a client through market-timing and selection of securities – particularly after costs and taxes are taken into account. This mirrors the difficulty faced by the majority of actively-managed funds despite their experience and resources.

Fortunately, skilled financial advisers can potentially contribute significantly to their clients’ investment long-term success in ways that have nothing to do with market-beating performance.

For the past 14 years, Vanguard’s Investment Strategy Group in the US has studied what it terms “Adviser’s Alpha”. This is defined as the value that advisers can add through their wealth management and financial planning skills – guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing – and as behavioural coaches.

In other words, skilful advisers can add considerable value by using the best wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing.

Vanguard just has released a new Australian edition of this classic investment research, using local data in an endeavour to quantify the direct value or “alpha” an adviser may add through such services.

The authors of the Australian report – including Francis Kinniry, a principal of Vanguard’s Investment Strategy Group, conservatively estimate that “Adviser’s Alpha” may add about 3 per cent, at least, to a client’s net returns. Much, of course, will depend on an investor’s circumstances.

For many investors, the best investment and wealth management strategies described in the report are likely to provide an annual benefit – such as from reducing investment costs and taxes. Nevertheless, the most significant value-adding opportunities would tend to occur intermittently and often during times of market duress or euphoria, according to the report.

During market duress or euphoria, advisers can act to urge their clients not to abandon carefully-prepared and appropriate long-term strategies in response to widespread market fear or greed.

Vanguard’s report outlines six ways that adviser’s can potentially add value that have no relationship to attempts to outperform any benchmarks:

• Asset allocation. As Smart Investing has discussed many times, research has long shown that asset allocation is the primary determinant of a portfolio’s return viability and long-term performance. Advisers can guide clients on the creation of portfolios designed to maximise their potential returns within their personal tolerance to risk.
• Behavioural coaching. With a strong personal relationship with a client, an adviser is in an excellent position to encourage a disciplined, long-term approach to investing as opposed to getting caught up with the prevailing emotions and “noise” of the markets.
• Cost-effective investing. By encouraging clients to invest in low-cost managed funds such as traditional index funds and Exchange Traded Funds (ETFS), advisers can add considerable value. The report uses Australian data to support this point.
• Rebalancing. Through periodic rebalancing of a portfolio, an adviser can ensure that a client’s asset allocation remains consistent with the risk/return characteristics of their target or long-term portfolio.
• Tax efficiency. Advisers can create strategies to ensure that their clients make the most of tax-advantaged savings opportunities over the long term from acquisition to disposal.
• Total-return versus income investing. Particularly at a time of historically low yields from balanced and fixed-income portfolios, advisers can explain to clients the benefits of focusing on their total returns from a diversified portfolio – that is income plus capital appreciation.

Advisers can alert clients to the added risks of moving away from well-thought-out investment plan in an effort to maintain their yields.

Significantly, this Adviser’s Alpha research should reinforce the qualities that investors should look for when choosing a financial adviser as well as reinforcing the fundamentals of sound investment practice.

Forecasts are always fraught with danger. The longer the time frame the more susceptible forecasts will be to wide variations in the range of possible outcomes. Which makes the Federal Government’s Intergenerational Report (IGR) such a fascinating exercise given it is trying to forecast what Australia will look like four decades hence.

The government of the day is required to produce the IGR every five years and its scope is to look at population trends, workforce participation and the productivity level of our economy.

The aim of the report is to promote community discussion about long-term government policy settings with a focus on intergenerational fairness.

The value of the IGR is clearly in the broad brush strokes it paints rather than the precision of its forecasts.

Demographics in so many ways define our destiny as a community and the demographic trends that this and the three previous reports have charted are clear.

The Australian population will be larger – around 40 million souls by 2055 – and much older with almost 5% or nearly 2 million people being aged 85 and over.

The good news is that average life expectancy at birth is forecast to continue to rise so that by 2055 men and women can look forward to lives spanning 95 to 96 years.

Not so positive is that as the population ages the workforce participation rate will slide. Where in 1975 there were more than seven people of working age (defined as 15-64) for every person aged 65 and over, by 2055 there will be less than three.

That has major implications for our productivity growth – not surprisingly it is expected to slow – but also for high cost budget items like the funding of the health system and the age pension.

The latest IGR will certainly inform and provoke debate around key policy settings within the tax system, the superannuation system and health services. Superannuation comes in for special mention in the report – in particular how as account balances grow, the implication for the Government will be reduced reliance on payments made through the age pension.

The report makes the point that the Government is “considering improving the way in which the superannuation system transforms savings into retirement income streams”.

While the report is about macro demographic and economic trends considered from an individual investor’s perspective there are some interesting – and at times conflicting – messages.

For a start the growing importance of the super system in meeting some of the challenges of the future and – as an investor – making sure you are saving enough for what is likely to be a longer period in retirement.

The paradox that is likely to emerge through the tax white paper discussion later in the year is that the super system’s generous tax concessions are likely to come under heavy scrutiny as the Government looks to improve the budget position.

The risk for investors is that the rules governing super will continue to change.

The irony for the Government is that while they need people to save more for their retirement to reduce reliance on the age pension the more they change the rules governing super and the more they undermine confidence in the system overall.

The major demographic trend of an ageing population is a significant challenge for Australia whether you look out 10, 20 or 40 years.

The superannuation system can provide a compelling answer to at least some of those challenges but it needs a period of policy stability that – like the Government’s latest report – truly spans this and the next generations.

A temptation for investors to resist when the outlook for investment returns is subdued is to abandon a carefully-constructed and appropriately-diversified portfolio in an effort to boost, or at least maintain, returns.

Vanguard’s economic and investment outlook 2015, Australian edition encourages investors to “evaluate carefully” the risk/return trade-off involved before shifting into higher-risk asset classes in their pursuit of returns.

In short, higher potential returns mean higher risks. It’s as straightforward as that.

As Vanguard’s report discusses, a shift to higher-risk assets may include “tilting a bond portfolio towards corporates [bonds] or a wholesale move from bonds into equities”.

The report’s authors are economic and investment specialists with Vanguard: global chief economist, Joseph Davis; Hong Kong-based senior economist for Asia-Pacific, Qian Wang; Australian-based economist, Alexis Gray; and US-based investment analyst, Harshdeep Ahluwalia.

They suggest that investors with investment objectives based either on set spending requirements or on performance targets may need to consciously assess whether they can tolerate the extra risk involved to still meet their goals.

The report concludes that a balanced approach would be for investors to consider adjusting their investment objectives given the outlook for lower returns. In other words, adopting a realistic approach to likely returns rather than taking greater risks.

Significantly, the global investment and economic outlook is discussed from the perspective of an investor with an Australian-denominated portfolio. (Read the report to learn more about its findings and the basis for its investment and economic outlook.)

Some of the key points made in Vanguard’s economic and investment outlook include:

• Global economic growth is likely to remain “frustrating fragile for some time”
• The investment environment is likely to be “more challenging and volatile in the years ahead”.
• Vanguard outlook for global stocks and bonds while not bearish is the “most guarded since 2006 given compressed risk premiums and the low-rate environment”.
• Modelling suggests that balanced portfolio returns over the next decade are likely to be below their long-term historical averages. “Even so, Vanguard still firmly believes that the principles of portfolio construction remain unchanged, given the expected risk – return trade-off between stocks and bonds.”
• Investors should have realistic expectations for investment returns and understand the implications of the prevailing market for their portfolios.
• A disciplined approach to investing should be maintained to achieve long-term investment success.

To treat the future with the deference it deserves, Vanguard believes that market forecasts are best viewed in a “probabilistic framework”. A primary objective of the report is to assist investors in making all-important strategic asset allocation decisions for their portfolios.

A critical take-away message is that investors should not readily surrender a carefully-constructed portfolio and move beyond their personal tolerance to risk in an attempt to lift performance in a lower-return environment.

No doubt, many astute investors will look at making some adjustments to their spending and their saving patterns, among other things, rather than taking on higher investment risks.

This may include if possible: taking a tighter control of spending, reducing investment management costs with lower-cost managed funds, considering postponing retirement (of course, not everyone can), and trying to save more to build-up investment capital.

It is also worth thinking again about the role of bonds in a diversified portfolio. In their role as a diversifier, bonds counterbalance the volatility of shares and other growth assets to reduce the variability of portfolio returns. The primary role of bonds is provide diversification to growth assets, income and capital stability.