Author Topic: Asset allocation in my Superannuation (Australia)  (Read 2613 times)

Mark31

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Asset allocation in my Superannuation (Australia)
« on: March 10, 2014, 12:41:45 AM »
I have a bundle of money in super, and I just learnt today that I can switch around my investment options as much as I want, with no admin or buy/sell fees.

As background, I absolutely cannot get my hands on this money for 20 years. I also don't get to neatly allocate my investment based on my perfect asset allocation, but by fiddling around I should be able to come close.

The current "Balanced" allocation I have (10% cash, 25% bonds (4/5ths Australian), 8% property, 15% Aus shares, 20% Int Shares, 12% Alternate Assets, 10% Infrastructure) really rocks when looking at performance over the last ten years.

However, looking at more recent performance, I really should have changed the mix a year, or maybe two ago. However past performance is no indicator of the future and all that.

What asset allocation would people suggest as appropriate for maximum growth over the next five to ten years?

How often should I do a re-balancing?

Should I be gradually changing any suggested mix over the next one/five/ten years?

Should my allocation outside of super having a bearing on what I do?

happy

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Re: Asset allocation in my Superannuation (Australia)
« Reply #1 on: March 10, 2014, 02:38:39 AM »
I have to say I am absolutely NOT an expert in this but have had the same thoughts swirling around in my mind with my super.

I'm 55, so my goals are different to yours, but these are my thoughts (and some more questions LOL).

My super fund has some premixes which contain allocations that sound a lot like yours. And has some single class options. I find my self concerned that with the premixes  that I don't have adequate control and that I'm not really sure what exactly in things like "alternative assets". But then with the single class options, I worry that I've missed out on some of these nebulous allocations whose purpose might be to reduce or counter volatility and add diversification, and secondly that I might presume to know better than the highly trained financiers running the fund. All in all a good basis for inaction!

Again just my thoughts:

Check out the costs of each option - in my fund some admin costs are more than others e.g. socially responsible is more expensive.

As far as I am aware re-balancing once a year is considered a reasonable way to go.

The same rules about not buying high and selling low apply, but in the premixes, at least in my fund, its hard to tell the exact price of anything specific, only an overall unit price. So when moving from a premix to individual classes be careful you can compare what you are doing. In my fund again, its not clear whether "Aussie shares" in a premix, are the same as "Aussie shares" in a single class for example. And again I can't buy a single class "Alternate Assets", so when you move out of a pre-mix you lose that to the extent you move out. I

These are just my thoughts but super is a tax sheltered environment so it makes sense to hold investments that make the most capital gain/returns in super. Stocks with fully franked dividends and lower capital gain might be better for monies held outside super. I started to get into all this but then realised at my age I was better just dumping into super, but I'd be interested in others' ideas about this FWIW.

Asset allocation is such a personal decision, you really need to decide what you are comfortable with. If you are locking the money up for 20 years, then one common advice would be to go for a higher growth strategy, which of course carries higher volatility and risk. Equally I have seen the advice that if you are investing for a very long time, then there is no need to go for risk, since compounding will get you there. It sounds like you've already read/know a lot..if you haven't try Bogleheads Wiki and the investing books on the investor alley.

Once retired its seems widely agreed thats its wise to keep several years of expenses (I like 5 years personally ) in cash/short term low risk and to start doing this in the 3-5 years leading up to retirement. But in your case this might be outside of super if you are going to FIRE.

I don't suggest you do what I'm doing, but just for interest I'm 55, planning to retire at 60 +/- 2 years. In super I have about 4.5 years expenses in cash (which I switched at the end of 2013) and the rest in a diversified premix ( my funds default option), which is a bit more aggressive than yours ( labelled 70/30 growth/income) with 5% cash/16%fixed interest/9% Alternative assets(defensive)/13%AA (growth),31% international shares and 26% Aussie. We'd had a couple of really good years in super and if I retired in 3 years ( best case scenario) and we had a big correction I didn't want to drop down too much.

I'm not sure holding cash in a super fund is exactly the same as outside though, since when you withdraw from the fund, I'm not sure you can just withdraw from the cash whilst you left the other part to recover. I guess by rebalancing you could effectively do this, but I have a feeling once you start withdrawing you may not be able to keep on doing this anymore. Something for me to investigate. Don't know if you've noticed, but there's a lot more info around about putting money into super, compared to concrete details about how to get it out.

Sorry for such a long rambly post.







Journalling at Happy Aussie Downshifter

Mark31

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Re: Asset allocation in my Superannuation (Australia)
« Reply #2 on: March 11, 2014, 12:25:06 AM »
Thanks happy for your comments.

The fees on the single class items "Australian Shares" or "International Shares" are only 0.29%. But they are not the same Australian shares you get as part of the pre-mix, and are limited to only ASX200 companies - so a kind of index fund, but they don't call it that.
And yes, the nebulous "alternative assets" don't have their own single class option, but there are a number of pre-mixes, and I can have differing proportions of them.

The socially responsible is the highest fee at 0.9%, and their standards aren't high enough to justify the higher fees, in my opinion. (Outside of super I have money invested in ethical funds, but that's another story).

I've got very little cash at the moment, I'm not close enough to worry about it just yet.

Outside of super, I'm actually hoping for higher capital gain - the reason being that I don't want to cash in until I retire, and with the first $18,000 tax free, I won't end up paying tax at all on the 35-40k I would take out.

If I had switched from my current "Balanced" to "Aggressive" one year ago, I'd have nearly 10% more super than I do now. On the one, three and five year comparisons, Aggro beats Balance, seven years, it's behind, and a ten year comparison is neck and neck. I just wish I knew if that has any bearing on future performance.

HappierAtHome

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Re: Asset allocation in my Superannuation (Australia)
« Reply #3 on: March 11, 2014, 01:00:10 AM »
I remember there being a comment on a thread aaaaages ago where "superannuationfreak" (pretty sure that dude/dudette has a blog by the same name - check it out, maybe?) made a case for having your super entirely in bonds and your non-super investments entirely in shares. I have no recollection of the reasoning behind this.

I don't know anything about super*, other than that 'mysuper' is coming out soon which forces the funds to offer low cost options rather than only have managed funds. Last Thursday's episode of The Checkout, available on ABC's iview, covered this and included the sage advice to invest in low cost index funds wherever possible.

*Not technically true - I check my balance regularly and know that I'm in a balanced growth fund. But at 26 it seems like a distant dream that this money will someday be accessible to me. I'll be FI decades before I can access my super.

happy

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Re: Asset allocation in my Superannuation (Australia)
« Reply #4 on: March 11, 2014, 05:15:24 AM »
Quote
Outside of super, I'm actually hoping for higher capital gain - the reason being that I don't want to cash in until I retire, and with the first $18,000 tax free, I won't end up paying tax at all on the 35-40k I would take out.

Ah yes " lovely low taxes of early retirement" make all the difference. I should have thought of that.

Quote
On the one, three and five year comparisons, Aggro beats Balance, seven years, it's behind, and a ten year comparison is neck and neck. I just wish I knew if that has any bearing on future performance.

After nearly 3 decades in super, thats how it seems to run as I recall. Over 10 year periods, aggro wins but not by much. My fund has a conservative option called capital guarded and last time I looked it was doing 6% over 10 years compared to  the Aggro version which was 7.8%.

Quote
I remember there being a comment on a thread aaaaages ago where "superannuationfreak" (pretty sure that dude/dudette has a blog by the same name - check it out, maybe?)

I did check this blog out at one stage, but at that point it seemed to be mainly detailed comparisons between different funds, and I didn't find the sort of strategic information I was looking for.
Journalling at Happy Aussie Downshifter

Mark31

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Re: Asset allocation in my Superannuation (Australia)
« Reply #5 on: March 11, 2014, 06:42:37 PM »
Thanks again for comments - regarding super funds, because I work for government, I can't choose my fund. I could have two I guess, but that's generally considered bad for costs, and the management fees where I am are very good. The Checkout episode could be useful. I didn't know they covered adult concepts like superannuation.

I did the sensible thing this morning. I got onto my super website and downloaded 14 years of unit prices for two different, but both appealing, pre-mix options.

I looked at the unit prices at the end of each six month period and then worked out the growth over different numbers of years.

So I had four 12 year periods to look at, six 11 year periods, etc.

The option I'm currently in, wins or is neck and neck for all 12, 11, 10 and 9 year periods, 11 out of 12 eight year periods, and 13 out of 14 seven year periods.

Based on that, swapping at this point would really seem to be an attempt to time the market, which I'm really not qualified to do.

Re index funds - I'm not convinced they're the way to go (at least in my super), as they are less diverse (as discussed higher up the thread) and the extra 0.3% in management fees I'm paying seems to have more than paid for itself in returns.
I recall reading some comments over on monevator that managed funds do better than index funds (before fees) due to that diversity - but I don't know what the typical fees people pay are.

superannuationfreak

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Re: Asset allocation in my Superannuation (Australia)
« Reply #6 on: March 11, 2014, 07:39:29 PM »
Asset allocation should be based on your willingness, need and ability to take risk (see an overview of Larry Swedroe's thoughts as described by the Canadian Couch Potato: http://canadiancouchpotato.com/2010/11/10/ready-willing-and-able-to-take-risk/ ).  The high-level ideas presented on US/Canadian sites (e.g. http://www.bogleheads.org/wiki/Asset_allocation ) apply to Australia also.  The tricky part for us is determining the equity allocation between Australian and overseas shares: Australian Shares have franking credits and no currency risk (or drag from hedging) for those of us who expect our long-term expenses to be in AUD, International Shares offer better diversification.  The exact split is a judgement call or best guess; if you find an allocation that has reasonable diversification while letting you sleep at night (so that you can stick with it through ups and downs) then it will probably do the job.

My blog is mostly product-focused; I'm not qualified to give financial advice and can't add much strategically over the many other resources out there (I did find canadiancouchpotato.com useful as the investing challenges for a Canadian aren't so different from those for an Australian).

One thing that is worth noting is that the ideal is to look at your asset allocation across the whole portfolio (including super and shares outside super but excluding cash for immediate needs, emergency funds, deposit for a near-term house purchase, etc.)

The reason it might be beneficial for a Mustachian (in particular) to put more of their bonds in super and more shares outside super is that capital gains outside super only count for 50% of the gain when sold after more than 12 months, and (usually) only count when you actually sell.  Bond/cash interest counts fully though.  So if you can keep most of your fixed interest allocation inside super at lower tax rates then when you retire early, with current thresholds, you can sell down enough shares annually with capital gains while potentially paying zero (or very low rates of) tax on the sale.  Of course taxes and super laws can change (but CGT changes are often 'grandfathered' in Australia) and an individual's situation may mean this isn't optimal for them (e.g. if you are not working full time and your investment income is not high then you may be on a 0% tax rate outside super and a 15% tax rate in super).
« Last Edit: March 11, 2014, 07:46:30 PM by superannuationfreak »

happy

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Re: Asset allocation in my Superannuation (Australia)
« Reply #7 on: March 11, 2014, 09:35:00 PM »
Thanks for weighing in Superannuationfreak:).

Re the bonds/fixed interest inside and shares outside:

Interesting, I get what you're saying.  As long as you don't sell any of your profitable shares outside until after retirement, this could be a feasible strategy. I guess one needs to run individual scenarios with math pre and post retirement to decide, because the answer might be different depending on one's marginal tax rates both rep and post retirement.  I was thinking high dividend shares outside being fully franked would work if you have a high marginal tax rate in accumulation.

The only issue I see is that I thought the idea of cash/bonds was to counter volatility, add stability and liquidity. If you have all your cash/bonds in super and can't access until age 60 ( and I suspect increasing the age of access might be one option for change by  the govt in the future) , and you FIRE ( at 30 or 40 years of age)  hoping to live off share sales, and there is a big correction shortly after you retire, its possible you might run out of money. Some of the reason for holding cash is surely obviated if you can't access it.
Journalling at Happy Aussie Downshifter

superannuationfreak

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Re: Asset allocation in my Superannuation (Australia)
« Reply #8 on: March 12, 2014, 04:40:29 AM »

The only issue I see is that I thought the idea of cash/bonds was to counter volatility, add stability and liquidity. If you have all your cash/bonds in super and can't access until age 60 ( and I suspect increasing the age of access might be one option for change by  the govt in the future) , and you FIRE ( at 30 or 40 years of age)  hoping to live off share sales, and there is a big correction shortly after you retire, its possible you might run out of money. Some of the reason for holding cash is surely obviated if you can't access it.

You'd probably want a cash buffer outside super as you retire. But you can always use your super to rebalance in a downturn: sell shares (by which I include etfs and other share based funds) outside super if required to live and move fund weightings from fixed interest towards shares within super.

There's still the possibility of protracted downturn but FIRE becomes pretty tough in that scenario regardless of which container you stash your shares in. Historically, at least, global  diversification can help mitigate that (Japan style) risk.