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There is Crap Performance and Then There Are Superannuation Funds

Whilst munching on my toast and vegemite and playing with my tablet (not a euphemism) I saw this neat little paragraph on news.com.au

Superannuation fund analyst Superratings’ figures show that annual returns for the median “balanced” super fund sector, which accounts for about 80 per cent of Australia’s $1.3 trillion super industry, averaged just 0.92 per cent a year for each of the past five years.

The ordinariness of this performance is so breath taking that there isn’t really much to say directly about it. Its simply crap and it is crap not merely because of the numbers but because of the impact of these numbers. What is occurring here is that one of the major pillars of most peoples retirement is simply not functioning in the way it should. This will have a vast range of flow on effects well beyond being simply embarrassing for those in charge of managing these funds. If you deprive the baby boomers of their major source of retirement wealth then you are going to have a severe generational problem.

The article continues with a statistic I found interesting –

Mr Bresnahan said the average return on a balanced super fund since compulsory super was introduced in 1992 was 6 per cent.

This figure jarred me for some reason so I went and did a little bit of research. According to the Australian Prudential Regulation Authority (APRA) the real return for the largest 200 surperannuation funds for the past 10 years is 3.9% and it is this 3.9% that is the important figure since it represents the lost decade of investing for baby boomers.

My guess is the 6% figure that is quoted is dragged along by the market boom from about 1993 onwards. The problem with this is that at the time the market was producing an intrinsic return of about 12% excluding dividends. So even in a boom the industry managed to under perform the market.

Within markets there is a myth that it is important to be in the markets all the time – this way you get all the good days/weeks/months. Unfortunately this is a myth since it is more important to miss the bad days/weeks/months than it is too catch the good periods. The reason for this is simple and can be stated thus –

A 10% loss cannot be recovered by a 10% gain, it takes 11.1% gain the move back to breakeven.

Once you understand this you know virtually everything there is to know about money management because within this statement is the basis for all money management. Once your money is gone, it is gone and you are on a hiding to nothing trying to recover it.

This is the problem with most managed funds they simply do not understand money management in any way, shape or form and this is to extreme detriment of their clients.

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