My super is in fixed interest and is decreasing: any advice?

[hoo izzie]

My super is all with Colonial First State FirstChoice Fixed Interest Select, Aussie and international fixed interest and it has decreased quite a lot over the past month. Anyone have any idea about why this might have happened? What has happened to fixed interest markets over the past month or so? Should I bail out of fixed interest and put more super in a profile that has more exposure to the stock market now that it seems to be improving?
hoo izzie

 

[Smurf1976]

This is just my opinion and not advice on what you should do but:

Interest rates have been at historic lows for quite some time, at or close to zero in much of the developed world.

That's a bit like saying it's 45 degrees outside - how much hotter can it really get? Seriously, the answer would seem to be "not much".

So there's not a lot of room for interest rates to fall / bond prices to rise (the two being inverse - one goes up the other goes down, that's how it works).

Without entering a political debate, there has been a rather clear shift recently with first Brexit and more recently the election of Trump as US President. Voters are rejecting the past 35 or so years of "economic rationalism" and there's a shift underway.

Now, looking at Trump's policies and assuming he implements them, in broad economic terms he's going to borrow money in a big way. Closer to home it's much the same, we're running deficits and regardless of who is in power (Liberal, Labor, anyone else) the 1990's - 00's focus on minimal deficits or actual surpluses seems to be over. Now we're in borrowing mode and that trend isn't confined to Australia and the US.

So, more borrowing = more bonds being issued. Now it's just basic supply and demand economics. Supply going up, more bonds being issued, and assuming no change in other factors that ought to mean lower bond prices (higher interest rates) going forward.

I saw on the news yesterday that one of the big banks, think it was Westpac but not sure on that point, has increased interest rates on loans. Another random data point but it's in the same direction and adds to the evidence of a shift underway.

That's a simplified view obviously but there's plenty of information online and I suggest some independent research to confirm what I'm thinking before you do anything. If you conclude that interest rates aren't going lower and are more likely to go up then fixed interest isn't where you want to be investing right now. Reverse that if you think that rates have further to fall.

 

[hoo izzie]

age 62, salary about 90,000, have about 1,050,000 in super and wife (doesn't work) has about 700,000 in bank account earning about 4000 a quarter, so we're well off...am on yearly contract at work and am thinking of packing things in around July next year maybe...will get about 30000 retirement gift from employer...
it's just that over the past month or so my super has dropped about 22000...it was 1,076,000 about two months ago...not sure what to do....leave it there or pull out and put it in another super profile with Colonial First State with more exposure to the stock market and a lot less to fixed interest?....just hate seeing the balance drop every day....

 

[systematic]

I do enjoy responding to these types of threads usually, but I need to ask first; since you've done a great job building up your nest egg - haven't you seen 2% drops before? Or did you build your wealth in cash and not the market in the first place?

 

[Junior]

age 62, salary about 90,000, have about 1,050,000 in super and wife (doesn't work) has about 700,000 in bank account earning about 4000 a quarter, so we're well off...am on yearly contract at work and am thinking of packing things in around July next year maybe...will get about 30000 retirement gift from employer...
it's just that over the past month or so my super has dropped about 22000...it was 1,076,000 about two months ago...not sure what to do....leave it there or pull out and put it in another super profile with Colonial First State with more exposure to the stock market and a lot less to fixed interest?....just hate seeing the balance drop every day....

If you can't tolerate any capital losses, you will unfortunately need to get used to returns of less than 3% per annum, before tax.

If you wish to do better, you will need to invest in shares, listed property and alternative assets. This will give you a superior yield and gains over time, but also introduce volatility and the chance of capital loss.

The need for you to invest in growth assets also comes down to your financial goals. How much income do you want/need in retirement? Do you wish to leave a legacy for children/grandchildren? Will you downsize your home? etc. etc.

I think finding a good financial adviser who can have a detailed conversation with you about risk and return, about the characteristics of different asset classes, and the trade-offs which take place if you want to achieve a return above the cash rate would be worth considering.

 

[OmegaTrader]

I am not an adviser, I am a amateur in investing, DO YOUR OWN RESEARCH



Please do not be offended by what I am about to say,

I think you are getting rooked. This is not a judge of your character but rather of the decision.

We all get rooked in our life, we trust men is suits and professionals. It's in our nature.

Your decision is not amazingly bad but I still think you could do better.


Below is a summary of the fund.





I will outline why I think it is bad.

1) The fund is not producing alpha or risk adjusted returns after fees

When you are investing one should be thinking about the returns you are getting relative to a benchmark.
Alpha usually refers to the returns of a fund relative to the stock market.

Normally it is using standard deviation/volatility as a proxy for risk and return as a proxy for reward.

An over simplified example is if the stock market returned 7% this year with a volatility of 12% and my fund returned 10% after fees ceterus paribus -all things equal and with a volatility of 12%.

Then my fund has produced an extra 3% in risk adjusted returns

In this example you should be comparing your funds performance to interest rates or the risk free rate.

Having a quick look the return this year was about 3.5% and overall return sine inception was about 3%
Now what needs to be remembered is that there is also a fee. On the image shown the fee is .9%. On further I found fee around .77% p.a management fee anda .2% transaction cost to enter and or leave.

Now even if you say it is between .5 and .75% to be conservative then one is paying .5 to .75 % out of your 3% return that is a massive amount. Of course being in super complicates matters.

But a quick google search will see that ubank(NAB) is paying around 2.81% for self managed super.

Of course this is not directly applicable to your situation, but it shows that with simple googling you could find a major bank to hold your super that would give you similar rates around 3% and not such steep fees....

So you are not getting any additional benefit to using the fund and are taking on more risk.

But it gets even worse....

2) There is additional risk involved including default,rates,currency,basis etc


You are not investing in the bank!!!

I was a bit perplexed as to why if you had money in the bank or at fixed interest that your balance would be decreasing.

Then looking in more detail I realised it was in fixed interest securities not fixed interest deposit.

The graph below clearly illustrates the realisation of this risk.




The standard alpha measure does not fully take into account the additional risk one is taking.

The fund is investing a portion of funds in sub AAA rated investments!!!
ding ding ding But return is not much higher

This introduces default risk.
But one is not being rewarded for this
Australian banks are esstentially supported by the goverment-at the moment - I hope
Looked what occured in the GFC
Enough said about that.

Also there is a risk that the fund will lose money because of currency or basis risk. Meaning that the currency of overseas investments moves against the securities. If this is hedged then there is a cost to this and when investing in markets, there is a risk that one can lose money by entering and exiting the market or that the actual investment will not track exactly the asset it is trading due to commissions, volatility etc but mainly volatility.

Finally there is interest rate risk.

Rates overseas could increase or even domestically. You never know. This move could be magnified by the fact that it depend s on what type of bond the fund uses and the loss could be greater than fixing the interest rates yourself. This is a bit compliated but essentially is probably what your seeing cause the downard movement..


Because you have fixed it in the past...

Current increases will mean that the rate you are getting is worse than the rate you have fixed you bond at...

If that makes sense.

But if you are in a varible rate then you would gain and vie versa.

As mentioned rates can't move much lower but they can go higher.


Here is some of the other options you could take

1) Postion sizing into a riskier assets/s

One don't need to invest all your money into shares or proeprty or cash.

One can invest a portion. So for eaxmple if 10% of a portfolio is in shares then the volatilty will be greatly reduced. So even in a crisi of 50% GFC style collpase, then the portfolio has only lost 5%. Even in a massive crash. But ones returns willl also be limited, that's life.

2) Equity and option strategies

I won't go into this a but advanced.. even for me

cash and call

or

stock and put

One can research these



A general overview of what I am thinking about your situation


I think that the fees are too high.
There is addtional risk compared to putting money into australian banks
There is no alpha being produced.
A comparable strategy of money the bank could be superior


1) inflation and tax adjusted returns
With rates so low and after inflation and tax a cash strategy has a really small return

2) The long term
In the long term conventional wisdom is that having money in equities is a good decision

3) physcology
I understand one feels. There is fear of losing money. It is hard to save
One wants to hold on to what he has earned.



4) The adviser trap and taking responsibility

But there reaches a certain point where one has to take responsibility of ones own finances.

I am against advisers but I fell that they are not immune to greed and one needs to understand the options for investing .

Paying .77% managemnet fee for mediocre cash like returns and taking more risk than cash at bank is not always a good deal.



Good luck

 

[Iggy_Pop]

I am in a similar position nearing retirement and wondering what I should do with setting up for retirement.

I am lucky to be in a defined benefit scheme for my main superannuation which is about 50% of our total investments. The money not in the defined benefit scheme is in a mix of balanced fund industry superannuation fund, term deposits and blue chip shares.

On retirement, our plan is 75% in super industry fund most likely in a balanced pension fund. We may consider something more conservative in our late sixties.

The other 25% will be in fixed deposits and shares outside of superannuation. With the tax thresholds as they are, we will get the returns tax free. Not sure what future changes may occur with superannuation so will keep some outside of superannuation.

So in your position, my thoughts are to investigate other superannuation funds and/or investment options with a risk the lets you sleep at night. Always remember all investment have risk and will move to a period of negative returns for some time. Need to look at the long term view.

 

[kermit345]

Even though I work in the financial advice industry, please do not take this as personal advice, merely an observation.

To hoo izzie:

If you don't like seeing your money go down and you're concerned about the recent drop that fixed interest has had then I don't think you could handle being invested in the property, aussie share or international share sectors. I'd say your only other option is cash because simply put those other sectors are 'growth' sectors and have much higher volatility then your fixed interest fund. If you're worried about the recent 2% drop you've had, you will be a mess unable to sleep if you had to go through a 5-10% drop being in shares/property. For instance last I looked some property funds had dipped 8% in the last two months - going by what you've posted I find it hard to believe that you could handle the stress of going through that.

To Iggy_Pop:

Whilst I don't necessarily have anything against industry funds please be careful when staying in a default or 'balanced' option. Typically these options are far from balanced and have around 65-80% in growth assets (shares, property, alternative, infrastructure) which isn't exactly balanced. If you want to truly be in a balanced fund then you'll need to look through the asset allocations for each of the industry funds investment options. Add up the cash/fixed interest %'s and whatever option has close to 50% in those areas that is more like a balanced option. It's important that everyone does this and not just accept the default option of industry funds when in reality the default option could be invested much more aggressively then you'd like.

 

[onthesword]

Given you're close to retiring and what has been mentioned above re volatility then this is a very relevant read:
http://gestaltu.com/2012/03/retirements-volatility-bogeyman.html/

 

[Iggy_Pop]

Thanks Kermit, I do agree the balanced funds are aggressive and not much difference to Growth. The one thing all the funds seem to do is focus on the balanced option with the bulk of the members in this option, and the option used for comparison. To keep their customers, need to keep it looking good and put considerable effort on the balanced option.
I have played around with different mixes and found I could not do any better than the fund managers with volatility and return. As mentioned, when we get in our late sixties, we will move to a more conservative approach.

Iggy

 

[OmegaTrader]

IGGY

In terms of your risk tolerance only you can answer that

I have played around with different mixes and found I could not do any better than the fund managers with volatility and return. As mentioned, when we get in our late sixties, we will move to a more conservative approach.

Iggy

In terms of your choice


I am asking



What fund is it?

What fees are being paid?


Then compare this to

A self managed investment option
A passive low fee investment option

Also when you are conservative there is little point in paying fees for someone to hold cash apart from the compliance fees and headaches required in managing super

So the tax benefits of super can be offset by management fees.

As I the previous example fees are taking a massive chunk of hoo izzies returns.

.77% to .9% off a approx 3% return

That is a lot

With no gains or alpha produced.

It is very hard to produce risk adjusted returns in cash. I have never heard of anyone that can do that yet

 

[Iggy_Pop]

Agree cash is a struggle, though I do have about 15% of investments in fixed term deposits making 3%, no fees and in my wife's name paying no tax other than Medicare levy outside of super. From my perspective, it makes no sense to have money in cash in super due to fees and 15% tax on returns. (my wife has not worked the last few years so Fixed deposits and Shares are all in her name). This sum outside of super does allow us to draw on it as required for holidays etc. This year been to France, Switzerland Japan, Scuba diving on Great Barrier Reef,Melbourne, Sydney and Brisbane several times.

I am in Australian Super balanced which over the last three years to June 16 has averaged 9.69% after fees. This financial year to date I have earned 4.1% after tax and fees. I have to wear some volatility with this but I am looking at a long time frame - several years before retirement and not touching super so over time I will come out ok, and doubt we will see another GFC in the short term.

Fixed interest in Australian Super paid 5.3% over the last three years and 1.2% this fin year.

Lower volatility and lower return. Whatever works for you and lets you sleep at nig

For me I can sleep at night after many years of monitoring super, tinkering with shares and planning retirement.

Iggy

 

[Value Collector]

Fixed interest is probably the worst investment you can make, what's the reason you want to hold cash equivalents anyway?

 

[kermit345]

It's pretty easy to build passive low cost portfolios using the vanguard ETF's these days which is my preference. I don't believe fund managers in the fixed interest or aussie shares space can really provide excess returns over the long term once you net their fees off. Particularly with aussie share funds ill provide a bit of an example. You have a boutique fund that selectively invests in small-mid sized companies. This fund does great for a couple of years as it can be very selective with its investments as it has relatively small level of funds under management. Performance gets noticed by the wider marketplace and their FUM starts increasing along with the investment returns increasing the FUM. Due to the size of the aussie market there comes a point where they simply cant continue to be selective and have to start placing money in the larger caps or in cash until the opportunities arise. Once this starts happening their returns revert to the mean or less once fees are netted off and you end up better off with the market index - note this scenario occurs quite often and this is even assuming it starts with a good manager that actually does add value.

AustralianSuper has been a pretty good performer over a relatively long timeframe and as long as you're aware that the balanced option isn't necessarily very balanced then thats the main thing. Also a little off topic but be careful not to go too conservative once you hit retirement, yeh you want to lower the volatility of your funds but you also might have another 20-30 years to live. Thats a long timeframe to accept lower returns by being in less volatile investments.

 

[prawn_86]

Great thread here guys, some real knowledge being shared

 

[Toyota Lexcen]

Fixed interest, TD's or online cash accounts outside of super funds and retail funds have performed fine, we have an XAO that has gone nowhere for 8-10yrs and who knows where it ends this year, dividends have been cut or stayed the same

depending on circumstances tax can amount to very little (for both cash & other)

so the extra % from share investment can come at a huge mental and financial cost

why have fund managers increased their cash holdings over the past 12months?

its a tough gig getting a decent return

 

[Bill M]

It's pretty easy to build passive low cost portfolios using the vanguard ETF's these days which is my preference. I don't believe fund managers in the fixed interest or aussie shares space can really provide excess returns over the long term once you net their fees off. Particularly with aussie share funds ill provide a bit of an example. You have a boutique fund that selectively invests in small-mid sized companies. This fund does great for a couple of years as it can be very selective with its investments as it has relatively small level of funds under management. Performance gets noticed by the wider marketplace and their FUM starts increasing along with the investment returns increasing the FUM. Due to the size of the aussie market there comes a point where they simply cant continue to be selective and have to start placing money in the larger caps or in cash until the opportunities arise. Once this starts happening their returns revert to the mean or less once fees are netted off and you end up better off with the market index - note this scenario occurs quite often and this is even assuming it starts with a good manager that actually does add value.

AustralianSuper has been a pretty good performer over a relatively long timeframe and as long as you're aware that the balanced option isn't necessarily very balanced then thats the main thing. Also a little off topic but be careful not to go too conservative once you hit retirement, yeh you want to lower the volatility of your funds but you also might have another 20-30 years to live. Thats a long timeframe to accept lower returns by being in less volatile investments.

There is a lot of common sense in these words which I agree with.

I mostly just buy ETF's now for my super. There is definitely no need to pay fund managers to get a return for cash. I joined ING living super and with that fund I can pick my own stocks and ETF's plus they offer term depositis @ 3.1% for 1 year. When your TD matures you get your capital and interest and you can clearly see how much get paid. There are no unit prices or fees for term deposits. There are cash funds out there offering much less with managers skimming a fee for doing nothing and guess what? Their returns are lower.

My opinion is move your super to a reputable manager like ING Living Super (there are others) and make the decisions your self on your terms with low fees.

About a year ago I bought VAF, https://www.aussiestockforums.com/forums/showthread.php?t=30450. It is the Vanguard Australian Fixed interest ETF. I bought it at a then price of around $49, it pays around 3.7% on my original cash input. During the holding period the price was in the green up about 4% and also in the red about 4%. One could get very worried about such price fluctuations. But during that time those 3.7% income streams kept on coming in. Right now VAF is showing a loss in my portfolio, who cares, the regular distributions keep on coming in. Nothing has changed and it returns more than cash, only the price has wobbled up and down a bit, it is not something I am concerned about.

What I would suggest to the OP is to be in control. Why pay a fund manager to give you 2% for cash when you can get 3.1% easy by yourself and for yourself? That is the questions you got ask yourself, look around and change if you have to, good luck.

 

[OmegaTrader]

Agree cash is a struggle, though I do have about 15% of investments in fixed term deposits making 3%, no fees and in my wife's name paying no tax other than Medicare levy outside of super. From my perspective, it makes no sense to have money in cash in super due to fees and 15% tax on returns. (my wife has not worked the last few years so Fixed deposits and Shares are all in her name).This sum outside of super does allow us to draw on it as required for holidays etc. This year been to France, Switzerland Japan, Scuba diving on Great Barrier Reef,Melbourne, Sydney and Brisbane several times.


Iggy

Nice one mate. Enjoy your life while you can



Also remember depending on your asset structure and age pensions are also available.

This is after you have spent all your money on holidays hahaha

Unfortunately there is an incentive to either have most of the money tied up in a house or to gift assets to children 5 years before pension.

Then to pass on the gains relatively tax free by will after death .

Sometimes it feels like self funded retirees are being punished for being fiscally responsible and honest.

Not to mention all the externalities/benefits of a pension and government programs for pensioners.

I am in Australian Super balanced which over the last three years to June 16 has averaged 9.69% after fees. This financial year to date I have earned 4.1% after tax and fees. I have to wear some volatility with this but I am looking at a long time frame - several years before retirement and not touching super so over time I will come out ok, and doubt we will see another GFC in the short term.

Fixed interest in Australian Super paid 5.3% over the last three years and 1.2% this fin year.

Iggy

The image represents $100,00 invested from 1986 to 2015 in various options



Aussie has produced alpha of about 2.2% and its returns are supposedly published after tax and fees.

My opinion is that this comes from the diversification across asset classes

My analysis is only cursory, I am an amateur, it is not advice or gospel truth.














Alpha .022
Corell .51
Beta .2

Yearly GEO Average returns

Aussie Super: 9.49%


Cash Retail Rate RBA Data 6.33%

All Ords: Gains, Dividends,Imputation 11.21%



Yearly STD

Aussie: 7.23%


Cash Retail RBA 3.28%

All Ords :Gains, Dividends,Imputation 18.85%



Data taken from:



Aussie Super returns every financial year from 1987 inception

according to aussie super net of fees and taxes

15% tax I don't know???

This is so complicated. Is it 15 % or 10% because of the 1/3 rd discount, when was this and that..
Legislation changes this and that...

Anyway...

https://www.australiansuper.com/inv...performance/investmentsperformanceannual.aspx

RBA data on one year retail fixed deposit

Deposit is invested in January and again next January etc

http://www.rba.gov.au/statistics/tables/

Yahoo price data and market index dividend data

https://au.finance.yahoo.com/q/hp?s=^AORD&a=07&b=3&c=1984&d=10&e=29&f=2016&g=m&z=66&y=330
http://www.marketindex.com.au/statistics

ASSUMED for simplicity
Index is bought in January and dividends are paid in December
Index is theoretically bought in January with divis again etc




Yahoo for price, Market index for dividends, .29% dividend imputation, 10% capital gains tax -paid in the big drop at end

I took 1% off for brokerage and to be a bit conservative

I didn't include brokerage, as this would be .1% once at the beginning and .1% at the end

Other considerations

Tax differences need to be adjusted in reality

Depends on personal circumstances

Is a bit complicated...

Capital gains can be 33% discounted in super for long term, Dividend imputations 30% refundable but may not be franked 100%, cash is taxed at full rate


Also don't forget inflation


Imputation was introduced in 1987 hahaha coincidence


Passive investing would incur costs, about .2% for ETF and .1% brokerage one way... this depends..


It depends when you buy during the year and what years you include as well...

Lower volatility and lower return. Whatever works for you and lets you sleep at nig

For me I can sleep at night after many years of monitoring super, tinkering with shares and planning retirement.

Iggy

Fixed interest is probably the worst investment you can make, what's the reason you want to hold cash equivalents anyway?

Value collector ...


I understand what you are saying. Cash in the long term is terrible.

BUT SAFE

That is the whole point of cash in retirement. To enjoy your life, smell the roses and not worry. Very few people can deal with a 30-50% GFC style drop.

Imagine losing $250,00 to $500,000 of your hard earned money you have taken your whole life to save.

Balanced, diversified, whatever it is losses are still soul destroying.

I have seen a mature man go into depression because he lost 30+% of his savings and he was an
economics lecturer.

Economics FFS.

That is why people go into cash. Even though the returns are so bad after tax and inflation.

Fixed interest, TD's or online cash accounts outside of super funds and retail funds have performed fine, we have an XAO that has gone nowhere for 8-10yrs and who knows where it ends this year, dividends have been cut or stayed the same

depending on circumstances tax can amount to very little (for both cash & other)

so the extra % from share investment can come at a huge mental and financial cost

why have fund managers increased their cash holdings over the past 12months?

its a tough gig getting a decent return

Interest has never performed fine in the long term history of financial markets

What are you on about

Yes the capital gains have been similar

You are underestimating dividends.....

and the fact that they have imputations 30% which are refundable

and the fact that capital gains have a 50% tax discount for long term investments

and the fact that interest is taxed at the full rate

Given similar assumptions















Interest is only for safety.

Long term it is a killer. Do your own research before commenting.

cheers















Toyota look at the graph and compare cash to the market.
Even if you put 10% in stock you will still do better.
And the variance is really minimal

 

[Iggy_Pop]

Great analysis Omega

The other consideration in how to manage retirement is while I am comfortable sorting out the investment strategy, if something happens to me and I am no longer capable of doing this, my wife needs some method of managing with some comfort. She is learning and I always involve her with things but the added advantage of a super fund is they can assist her with things. We do have a legal side sorted, but still looking for a good financial adviser/accountant who would be able to help. We have tried a few but generally, while I am no expert, I seem to be across things better than they are and each time the result has been, we can not add anything to what you have already set up. I will keep looking

Iggy

 

[OmegaTrader]

Yeah sometimes simple is best.

Apparently warren buffet has left his wife money in a passive etf.

Easy no hassle, just leave it .

Cash in the bank is easy to managed.
Super is already managed

Unless you can produce more alpha yourself then what is the point.
Just take it easy and invest a small amount as a hobby.


These two strategies do not require an adviser. The super found already does that to some extent.

The caveat is of course if the situation gets more complicated.

Aged care, pension, legislation changes, etc

But I generally find there are a lot of resources and agencies that can help out there, it just requires time, effort and a bit of mental work/stress.



In my experience advisers are only really worth it for people who are clueless or for complicated/wealthy individual situations.