Dramatic market swings, US Federal Reserve deliberations and discouraging data from China have made headlines in Australia and around the world in recent months. We asked Vanguard’s global chief economist, Joseph Davis, for his perspective.

Since the global financial crisis, economic growth in many developed countries has been modest, while share markets in New York and elsewhere have enjoyed a strong run (recent volatility notwithstanding). What explains the disconnect?

There have been two phases to the latest bull market, and that’s actually somewhat typical. The first phase is generally characterised by pessimism. The equity market just after the financial crisis was anticipating an even more sombre economic environment than perhaps the economics community was. Fundamental valuation measures for shares, such as price/earnings and price/book ratios, as well as dividend yields, were extremely low. So the market to some degree rises when the corporate sector outperforms these pessimistic expectations.

Certainly at Vanguard, we were saying that the global recovery was likely to be extremely muted, but our message was that the investment outlook could be much better than the economic one. That was in large part, again, because of valuations.

In the second phase, there’s an element of momentum and increased risk-taking. In the past two or three years, valuations have become stretched. In other words, the stock market has outperformed what the improvement in the economy might warrant. Stretched valuations, or what we’ve described as “froth” in some parts of the equity market, are why our outlook has become more guarded of late.

But even with recent volatility we’ve seen we wouldn’t characterise the financial markets as “cheap” by any means. Our long-term outlook remains guarded, but not bearish.

To be clear, we believe investors should continue to participate in the markets and stick with their asset allocations. Things could remain bumpy for some time, but that’s all the more reason to look through the volatility and stick with one’s investment plan.

China has long been the driver of global growth. Now it’s sputtering. What’s next?

The fact that growth in China is slowing isn’t news; it’s intentional. It’s part of Chinese policymakers’ longer-term plan, part of their rebalancing toward less investment and more consumption. Because the economy has been slowing for some time, the markets assumed China would be able to engineer a smooth deceleration – not a contraction, but a deceleration – with lower levels of investment offset to a good degree by increased consumption.

I think over a long period of time, that’s a very reasonable expectation. But there’s mounting evidence that China’s economy might be decelerating more sharply than expected and possibly even heading for a “hard landing.” Fears that the transition won’t necessarily be as smooth as some would hope is part of what the recent turmoil is about. The Chinese government’s target for GDP growth is roughly 7%, but the economy could actually be running at about 5% by our calculations, and the risk is that it might go even lower.

The markets were expecting that China, as part of its rebalancing, was going to have less real estate investment. But its slowdown in housing and other real estate sectors has been significantly underappreciated and, by our analysis, accounts for more than 75% of the slowdown in China’s economy since the global financial crisis. It’s unlikely we’ll see real estate investment reaccelerate in the short term given the overcapacity in manufacturing and in the housing market, particularly in certain Chinese cities. It’s also the case that Chinese policymakers don’t wish to return to the old business model of ramping up investment.

The prospect of a Chinese recession – an outright contraction in China’s GDP – linked to housing investment is not our baseline scenario, but it is the greatest risk we see for the global economy and the financial markets over the next year or two.

In the US, the Federal Reserve has been preparing the markets for an interest rate hike for more than two years. What will it mean when the Fed does finally act?

As to why it’s taken so long, I’d point to a number of factors. Growth has come in even weaker than the Federal Reserve expected. Core inflation – which excludes volatile food and energy prices – has come in below the Fed’s long-term target of 2% year-over-year for more than three years. And the unemployment rate has been above the Fed’s estimate for “full employment.” That backdrop explains a lot of why interest rates have remained close to zero.

When the Fed finally acts, I think the first rate increase or two should be welcomed as a vote of confidence on the resiliency of the US economy. Growth hasn’t been stellar, but it has clearly held up despite disappointing growth across most of the rest of the world. And it would be tough to look at the US labour market today and argue that interest rates should be at zero, the same place they were in 2009.

So conditions are appropriate for an interest rate “lift-off” but – as we have been saying to our shareholders for some time – more important than when it starts is where it stops. We expect to see a “dovish tightening,” with rates rising slowly and stopping at a level far lower than in some previous tightening cycles. We could see the US federal funds rate rising from crisis levels to roughly 1% over the next year or two, but with the Fed then setting the hurdle higher for further hikes – pinning them on the health of the US economy, global economic conditions and where inflation stands.

Economic news can be an endless source of fascination. But what role, if any, should it play in our investment decisions?

Any economic statistic that comes in differently from what was expected can influence the financial markets and the prices of one’s investments in the very short term – in fact, almost immediately. And you can see that with regularity, whether it’s a labour report, Chinese GDP or so forth. That’s understandable, because the financial markets are trying to price in or reflect economic risk in real time.

So growth coming in weaker or higher than expected, for example, may have implications for corporate earnings or the level of interest rates and can change the financial markets’ level of risk aversion. That’s natural. One actually does see, over very short periods, a high correlation between the surprise component of statistics and movements in the stock market.

However, I think what’s important – and what’s often lost if you focus on near-term economic news – is that, in many ways, those surprises wash out in the long term. What has much more impact on the performance of investments over longer periods are the trends in the economy and how the financial markets view those trends.

The 1980s and 1990s, for example, were arguably one of the strongest bull markets for both stocks and bonds. Was that because growth was consistently above expectations over the period? No. There were recessions, and we even had bear markets, including the 1987 crash.

What mattered were initial conditions – interest rates were very high and stock valuations very depressed – as well as long-term trends in the economy that would have been hard to identify in advance by looking solely at month-to-month statistics. Global disinflationary pressures led to a marked drop in interest rates and, hence, a bull market in bond prices.

We also had the fall of communism, increased globalisation, and the rise of certain technologies such as the internet spurring a rapid expansion of the global economy. Those factors, among others, arguably were significant contributors to the high rates of returns investors experienced over those two decades.
In the short term, there’s more noise than trend in economic statistics. To help separate the two, ask how a piece of economic news affects your long-term view on the outlook for growth and inflation. And, second, is that view markedly different from what the financial markets are now incorporating in the prices?

Only when both those questions are answered in the affirmative should investors even contemplate making any changes to their portfolios. And I can tell you, having spent 20 years in this business, that those occasions are rare.

There is one powerful, simple fact about the $140+ million wagered on this month’s Melbourne Cup that the investment industry can probably only dream of emulating. No matter how little – or how much – you decided to bet based on the horse/jockey/colour/lucky number, the one thing that was not in doubt was that you knew you risked losing the lot.

Indeed, the average punter on Australia’s most famous horse race probably expected to lose whatever bet they had placed. That is often seen as the price of being involved in a horse race that is a national – and increasingly international – celebration of the sport of kings.

A win, for most people, would make a good day better, while the loss would hopefully not be crippling.

Indeed the history-making win by Michelle Payne to become the first female jockey to ride the winner in a Melbourne Cup probably helped ease the short-term pain of those who had backed the short-priced favorites only to see them finish behind a local rank outsider.

Melbourne Cup punters understand that gambling is not investing.

However, at times investing can be akin to gambling, particularly if you do not understand the risks involved. The challenge for investors is that understanding the risks in a particular investment can be easier said than done.

This week, the chairman of ASIC, Greg Medcraft, spoke publicly about the challenges our securities regulator faces in ensuring that investors fully understand the risks they take when investing in complex and risky investment products.

Medcraft was speaking in the context of new powers that are proposed to be given to ASIC, following the recommendations by the Financial System Inquiry, which will allow the regulator to directly intervene where it sees products being mis-sold to investors.

The objective is to put more responsibility on product issuers for both the product’s design and how it is being sold. While the detail of those new powers is yet to be released the other side of the coin is communicating with investors in ways they can understand clearly what risk they are taking on.

Product disclosure statements take a lot longer to read and digest than the Melbourne Cup form guide. They are by their nature serious legal documents crafted carefully to ensure that product issuers are disclosing everything in accordance with the law. So it is hardly surprising they do not make for riveting bedtime reading. Nor is it surprising that many – if not most – investors simply do not read the PDS before investing.

Notwithstanding the new product intervention powers ASIC is expected to receive, Greg Medcraft has also challenged the industry to explore other ways to help investors improve their knowledge of the products they are considering investing in by using modern technology.

These days the rise of social media platforms like YouTube, Facebook, Twitter and LinkedIn has dramatically changed the way people not just access information but how they process and use it.

Vanguard participated in a pilot program in conjunction with ASIC to develop an electronic Key Facts Statement that potentially could replace a printed PDS.

It was developed for tablet application and incorporated video, audio and animated graphics. Also included was an investor self-assessment quiz to gauge different levels of understanding.
The goal was to understand if short-form disclosure could be engaging and effective. The results overall were positive with the clear message out of the consumer testing for the need to present information in the simplest format possible.

Information on costs and being able to access that information easily was of high importance to investors who took part in user testing. Content on risk and return also ranked highly on the importance scale but consumer understanding varied widely.

We’ve only just begun to explore how technology can help consumers understand the real costs and risks of investing, but it is clear that having simpler, more interactive and engaging product disclosure in place will help people avoid taking bets on their financial future.

It’s often said that the secret of success in any endeavour is “stickability”, your capacity for staying committed to a goal. But success also depends on having goals you can stick with. Managing that tension is what an advisor does.

Inspired by the impressive weight-loss of a work colleague, a portly middle-aged man decides to copy the program that gave his friend such results. It’s a crushing regime, involving zero carbs, 5am sprint sessions and mountain biking.

You can guess what happened. The aspiring dieter lasted about a week on the program before throwing it all in and returning to sedentary life, donuts and beer. It may have been better for this individual to get some advice first, starting slowly, swapping the mountain biking for brisk walks around the block and dumping the zero carb diet for light beer. He may not have shed weight as quickly as his friend, but he probably would have had a better chance of sticking with the plan in the longer term.

Similar principles apply with investment. You envy acquaintances who seem to have succeeded with high-risk strategies, but that doesn’t necessarily mean those are right for you. And in any case, their barbecue talk may leave out key information, like how they sit up all night watching the market and worrying.

Just as the want-to-be weight loser can’t live with 5am sprints, not everyone can stick with highly volatile investments that keep them up at night or that cause them to constantly second-guess themselves. And few people can do it without a trainer.

On the other hand, reaching a long-term goal like losing weight and building wealth requires accepting the possibility of pain and uncertainty in the short-term.

The trick is finding the right balance between your desire to satisfy your long-term aspirations and your ability to live with the discomfort in the here and now. Quite often, this tension can be managed through compromise. In other words, you can accept some temporary anxiety or you can moderate your goals.

The point is you have choices. And the role of a financial advisor is to help you understand what they are. So, for example, an advisor can assist you in clarifying your goals and setting priorities. Which is more important—the family holiday or the education fund? Perhaps you can do both by swapping the overseas resort for a camping holiday without dipping into the education fund.

It’s just like a personal trainer would be unlikely to recommend an out-of-shape sedentary business executive to start running marathons or try to halve his body weight in six months. The job of the trainer, or an advisor, is to manage your expectations and ensure the goals you are pursuing work with everything else you want to achieve in your life.

An advisor can also assess your capacity for taking risk. Not all of us are thrill seekers. And that’s perfectly OK. A portfolio that’s right for one person may be all wrong for another. That’s because each individual’s circumstances, risk appetites and goals are different. A financial plan shouldn’t be a cookie-cutter approach.

A third contribution an advisor can make is to help you manage through change. Our lives are not static. We change jobs, our incomes evolve, we take on new responsibilities like children and mortgages, we deal with aging parents, we move cities and countries. Nothing stays the same and a financial plan shouldn’t either.

So not only do different people have different goals, but each person’s own goals evolve in unique ways as they move through life. Reaching those goals requires a detailed and realistic plan, plus a commitment to stay with it. Some people may be up for the triathlon when they’re young and fit. But in later years, they might just need a more conservative program of stretching and walking.

You can try doing this on your own, of course. But it makes it easier if you have someone to keep you focused, keep you disciplined and help you change course when the circumstances of life require it.

Now that’s stickability.

It’s been called the greatest Grand Final in rugby league history. But the greatest moments were squeezed into a matter of seconds at the end. There’s a lesson here for investors impatient at poor market performance.

The North Queensland Cowboys, led by the inspirational Jonathan Thurston, stole a dramatic come-from-behind victory against fellow Queenslanders the Brisbane Broncos in the final moments of the 2015 NRL Grand Final on 4 October.

But just over six months earlier, near the beginning of a long season, the Cowboys had crashed to a humiliating 44-22 loss to the same team. Thurston’s team were “struggling for answers”, said media pundits, all but writing them off for the year.

For anyone despondently following the performance in recent years of the Australian equity market and of small and low relative-price stocks, in particular, the Cowboys’ experience in 2015 is a neat anecdote of how markets work.

Firstly, past performance tells us little about the future. In 2008, the year of the global financial crisis, the Australian equity market, as measured by the S&P/ASX 300 Accumulation index, fell nearly 39%. A year later, the market rebounded 38%.¹

Among low-relative price stocks, the contrast was even more dramatic. In 2008, the Fama/French Australia Value Index, a barometer of that part of the market, fell 45%. The following year, it rebounded 43%.

In small company stocks, too, the turnaround was emphatic. The Dimensional Australia Small Index, a proxy for low market capitalisation stocks, fell nearly 50% in 2008, only to bounce back by nearly 66% in 2009.

But market premiums, just like rugby league teams, don’t always turn around so quickly. Indeed, realised premiums can be negative for several years in a row, as we have seen recently with low-relative price and small company stocks in Australia.

The temptation in these circumstances, to use the sporting analogy, is to get out of your seat for a while and come back when things look more “hopeful”.

But there’s no evidence that you can reliably time these premiums in the short-term. That’s because they are unpredictable and can come in short and significant bursts, just like in football. The Broncos were winning 16-12. But with seconds to spare, the Cowboys came back with a try and a drop goal in extra time to win it 17-16.

This isn’t to imply that a market turnaround is impending. But it does mean that changing your portfolio based on forecasts, instead of on your own risk tolerance, goals and needs, is a hazardous business. (Dimensional researcher Jim Davis has a detailed study on the perils of short-term tactical asset allocation here).

After their early season capitulation against the Broncos, the Cowboys were at long-odds of getting into the top eight by the end of the regular season, never mind reaching and beating the same team in the Grand Final.

The market, size and value premiums are like that, too. When they’re negative, it can test the patience of investors. We’re tempted to give up, switch channels or watch another game where the outcome seems more predictable.

But becoming a rugby league champion is a long-term grind. And success may only be finally determined in a very brief window.

As an investor, you need to take a similar approach. Stay the full “81 minutes”.

We have long read and heard tales of retirees taking much of their super as a lump sum and rapidly spending all of the money on improving their immediate lifestyles – only to fall back on the age pension.

Such stories have gained increasing attention of late given the prevailing widespread discussions about the future direction of Australia’s super system and in the wake of the latest Federal Budget. (See The super agenda for change, Smart Investing, June 9.)

Yet actuary Michael Rice firmly rejects any suggestions that a large proportion of superannuation retirement benefits are withdrawn from the super system upon retirement and quickly spent.

In a recent opinion piece, Superannuation Myths Unbundled, Rice points to research by Rice Warner Actuaries showing that about 85 per cent of the value of all superannuation retirement benefits in dollar terms are invested in super pensions.

Only about 9 per cent of retirement assets in dollar terms were taken as a full lump sum in 2013-14 while the remainder was taken as a partial lump sum.

And at least a third of the money taken as lump sums was “invested in bank term deposits, which is a form of savings, and most of the rest was used to for debt reduction, which is also a form of savings”, Rice adds.

And interestingly, he forecasts that 96 per cent all retirement benefits will be taken as an income stream by 2025 as the superannuation system matures.

Part of the reasoning for this forecast is that members will be more inclined to keep their savings in the concessionally-taxed super system through retirement once their balances have grown to more significant amounts. Also, more retirees are likely to leave their savings in super as their level of financial understanding grows.

Some of the confusion about just how much super is being paid out in lump sums would be due to how the statistics are interpreted or misinterpreted.

According to Rice Warner research, almost 60 per cent of superannuation accounts at the time of retirement in 2013-14 had their balances withdrawn as a lump sum or partial lump sum. Yet, as discussed, almost 85 per cent of the retirement benefits are in dollar terms. This shows that many low-balance members are taking lump sums.

Most of us will eventually face the critical personal finance issue of whether to take our super benefits as a lump sum, a superannuation pension or a combination of both.

Ideally, super fund members will address this matter long before their intended date of retirement as it is likely to have a significant impact on their savings patterns before retirement and on their standard of living during retirement.

One of the critical ways that a good financial planner can provide guidance relates to assessing the client’s retirement benefits given their particular circumstance and then creating a plan on how to invest in retirement.

A regular superannuation pension – often supplementing an age pension – can make, of course, a significant difference to a retiree’s standard of living.

And from a tax perspective, super fund assets backing the payment of a superannuation pension are currently not subject to tax. Further, pensions (and lump sums) payments received by members aged over 60 are not taxed.

Another consideration for retirees is that the personal tax-free threshold of $18,200 for individuals means that a couple can hold relatively valuable portfolio outside super before being liable for tax. (This is aside from the Senior and Pensioner Tax Offset if eligible.)

Indeed, many retirees choose to hold their retirement savings inside and outside super if appropriate for their circumstances. There is much to think about and to discuss with an adviser.

When considering taking a career break, we would tend to focus from a money perspective on the loss of income and probably much less on the impact on our ability to save for retirement.

In short, leaving the workforce for a period – perhaps to raise a family or help care for an elderly parent – affects our compulsory and voluntary super contributions.  

It could be said that the impact on our savings capacity is the hidden or less-obvious financial cost of taking time out from the workforce for family reasons.

MoneySmart, ASIC’s personal finance website, has a useful and timely personal finance tool called a Career break calculator, designed to crunch the numbers on the cost to savings of a career break, given an individual’s personal circumstances. These circumstances include current income, current savings pattern and intended length of time out of the workforce.

The ageing of Australia’s population and increasing longevity will no doubt lead to more adult children – many of whom would be nearing retirement age themselves – leaving paid work for a time to care for very elderly parents.

Not surprisingly, research papers from the Association of Superannuation Funds of Australia (ASFA), Rice Warner Actuaries and Vanguard, among others, name interrupted working lives among the prime reasons why women have lower average super savings than men.

Another critical reason why women have lower average savings than men is, of course, that their average incomes are lower. See Super’s gender gap: the ‘gendermomics’ of retirement savings, Smart Investing, October 2014.)

An ASFA research paper, An update on the level and distribution of retirement savings (PDF), published in March, suggests that average super balance of men at the time of their retirement in 2011-12 was 88 per cent higher than the average balance of women in 2011-12.

Fortunately, there are ways to try to minimise the impact of a career break on your long-term savings that a financial planner can explain in detail, taking your circumstances into consideration.

For instance, the making higher voluntary super contributions within the contribution caps if possible in the years before taking time out of the workforce can provide a valuable savings buffer for when your salary stops flowing. (MoneySmart’s calculator provides an option to take such higher contributions into account in its calculations.)

Perhaps, an opportunity may arise – again allowed for in MoneySmart’s calculator – to make larger lump sum contributions, perhaps from an inheritance or asset sale into super.

Another way to plan to build up retirement savings is to consider retiring permanently at a later date than initially envisaged. (This is also addressed in the calculator.)

There is a strategy to keep contributing to super during a career break by practising contribution splitting between spouses. This involves a spouse still working directly some or his or her concessional contributions (compulsory, salary-sacrificed and personally-deductible) into the super account of a spouse who is taking time out of a career.

Super fund members can ask their super funds to transfer up to 85 per cent of their concessional contributions into a spouse’s super account – whether or not the spouse is in the workforce.

When facing an interrupted working life, it is crucial not to overlook the possible impact on retirement savings – and to try to do something about it.

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.