No selling, working, or stealing required. The trick is to choose a low-cost super fund and invest in single asset classes.
Note: Please don’t take this as professional advice, or even unprofessional advice. It’s just an idea, not advice, but it is based on what some professionals may advise and on what someone unprofessional would do. Do your own research and make decisions for yourself.
I don’t intend to wait until I can access my superannuation to retire, but it doesn’t mean I don’t want to get the most out it. In fact, I want to get as much as possible out of it.
To get the most, I need it to grow.
But investment performance is a fickle thing. While some providers and fund managers outperform over one timeframe, they may underperform in another. If the fund manager is having a good run now, it is most likely they will have a bad run later.
Don’t believe me?
Can’t be bothered to read it? Ok, well here’s the takeaway message anyway:
Over two successive three- and five-year periods, the majority of outperforming funds failed to beat their respective benchmarks, and most funds in the top quartile did not remain there consistently.
What does that mean?
It means that only 2.2% fund managers who were top of the class over the first five-year period, were still top of the class in the second five-year period.
In fact, for the five-year period, more top-quartile Australian Equity General and International Equity General funds dropped from the top to the bottom quartiles than stayed in the top quartile.
In the long run, everyone does pretty much as good as each other.
Even if some do perform slightly better, it will be impossible to know now which ones will do well in the future. Past performance indicates that they made some good decisions in the past, and reaped the reward for doing so. But, it doesn’t mean they are still making good decisions.
So, how to choose a fund manager and how do I retire with this extra $200,000?
Pick the one who will charge you the least.
If you are like me, you probably never even noticed how much your superannuation costs or ever thought it really made much difference. Well, it does.
Going low cost and assuming that they will perform just as well as anyone else—which you might as well go ahead and do because you just can’t tell who will do better—is how you save big time.
There are two tricks to low-cost superannuation:
- Find a low-cost fund; e.g. a member-owned, industry or not for profit fund
- Invest in single asset classes; e.g. Australian shares, international shares, fixed interest, etc.
If you’re not with a low-cost provider already, it will take you about five minutes to find one and download the form to switch.
If you already are using a low-cost provider, it will be even quicker to swap asset classes and save thousands over your lifetime.
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Step 1. Find a low-cost fund
From an investment sense, super funds are not really all that different from managed funds. Lots of individuals contribute small amounts of money, the total of which a fund manager uses to invest.
Any returns from the investments are divided proportionately among the contributors.
But first, the fund manager takes a bit to pay themselves a wage, rent an office, stock the lunch room with premium coffee beans, etc. That seems reasonable; they did the work so they should be paid and able to drink good coffee.
But, most fund managers are a business, so they don’t only want a wage, the business owners want a profit, so they take a little bit more (I’m not suggesting this is a bad thing, it’s actually how you make money investing in the first place).
That is how ‘retail’ super funds work—the kind of funds offered by banks and investment management companies.
Low-cost funds, on the other hand, don’t need to make a profit. They are member owned or not for profit and can return all earnings after costs to the members’ accounts.
So how much of a difference will this make?
Well, for $50,000 it will save you about $300 a year.
I won’t name names, but an employer-sponsored fund I found through one of the big banks cost about $600 a year in fees for a balance of $50,000 (this is roughly 1.2%). A very similar product, with the same asset allocation, through a low-cost provider costs $300 a year in fees (about 0.59%).
Now, that doesn’t sound like much, but over time it makes a huge difference.
In this graph, we started with a balance of $50,000, added $500 each month for 30 years. Growth was set at 7%.
The pink bars are a retail fund at 1.2% fees, and the blue are a low cost fund at 0.59% fees. By the time you get your super you will have over $100,000 more money just by using a low-fee fund.
This of course assumes that both funds achieve the same growth, which as I discussed earlier is the only assumption to make.
Where do I find these industry funds?
There are a lot of industry funds—check them out here.
And here’s the thing. You don’t have to be in the industry to join an industry fund. Plus, you can move all of your existing superannuation into an industry fund once you’re a member.
That was step one—change to a low cost provider.
If you are already using a low-cost provider and want to get even more, consider step two—creating your own asset mix.
Step 2. Create your own asset mix
Most super funds are a multi-asset product. That is, they take a little bit of this, a little bit of that and make a blended fund. Sort of like a pack of muesli; it already has the oats, fruit, nuts and seeds.
What I’m suggesting is you buy the oats, fruit, nuts and seeds individually, mix them yourself and save money.
Most super providers will offer single asset classes e.g. Australian equities or Australian fixed interest.
Check out the cost difference between Australian equities and the ‘high growth’ fund for First State Super:
Australian equities are only $40 a year, whereas the mixed fund is $295.
It is SEVEN times more expensive to let them mix your super fund!
Now you might be thinking:
- Hmmm, I don’t know if I can mix it as good as a fund manager would. I tried to make my own muesli one time and it had too much cinnamon and sunflower seeds.
Well, don’t worry because what I am suggesting is you just copy what the funds are already doing.
Look up the asset allocation ratio of the fund you want to copy e.g. ‘high growth’.
Arrange your super into single assets at the same ratio; e.g. 30% Australian equities, 30% international equities, 20% fixed interest, 10% property and 10% cash.
You don’t need to work out some perfect blend, just copy them and keep your money.
Here’s the result of going single asset allocation over pre-mixed:
You save another $100,000 over the 30-year period!
Of course, the benefit of using a ready-made fund is you don’t have to do the mixing. But it really isn’t that hard.
For the super fund I am with, you can reallocate existing money to whatever fund or asset class you want, and have new contributions go in according to a pre-set ratio.
Why are single asset classes so cheap?
- They aren’t blended.
- They are sometimes an index fund.
But don’t let that scare you. Do a Google search for ‘Warren Buffets bet that an index would outperform active fund managers over 10 years’.
Sure, you could pay a fund manager to try to actively beat the market, they might even do it. But they are just as likely to underperform.
So, to retire with an extra $200,000:
- Swap from a retail fund to an industry fund.
- Choose your own mix of single asset classes.
Don’t rush out and do this straight away.
Have a think about this idea, make sure it’s right for your situation, find some faults with it, and improve it.
Once you’re comfortable with the idea it will only take a few minutes to swap your funds, but doing so might make you a whole lot richer one day.