All Ords Report 13 July 2016
Australia has a big super black hole. But how deep it is depends on who you speak to.
Currently, APRA says that Australiaís defined benefit super liabilities are $340 bn. What does this mean? It seems that there is a huge gap in the value of assets held in these superfund coffers, and what has been promised to be paid to people in retirement. Presently, there is only around $158 bn in assets to cover these payments, which leaves a $182 bn black hole.
Thatís bad enough but some analysts say that the real liability may be at least 10 per cent more.
A defined benefit superfund generally determines payments by a specific formula, rather than being based on investment returns and accumulated assets. So it promises to provide a specified monthly benefit for life from the beginning of your retirement.
Many of you may be looking at your super fund wishing your super fund would provide that. But unless you work in the public service you are unlikely to have this type of fund.
Problem is, if the superfund doesnít generate sufficient returns to cover future liabilities, whoís going to fill that black hole? The Australian government is responsible, which means we all wear the risk. No wonder governments continue to push out the pension age.
Part of the reason that the size of the hole will differ, depending on who you speak to, is because fund returns can vary greatly from one year to the next.
Self-Managed Super Funds
On a slightly separate issue, still related to superannuation, one of the biggest changes to the Australian superannuation landscape was the flood of money into Self-Managed Superannuation Funds (SMSFs) after the Global Financial Crisis (GFC). And we continue to receive calls from people wanting to set up SMSFs.
Remember, running a super fund is not for everyone. Depending on how you set up your SMSF, and the types of assets you intend to invest in, can mean that it doesnít have to take a lot of time to manage. However, it will require more of your time than if you had your money in a public fund.
Remember, you have to take the responsibility of managing your fund seriously. Even if you have professional accountants assisting you, ultimately the buck stops with you.
What do we expect in the market?
The Australian share market closed at 5315 points last week. This is the second week the market has closed above 5300 points since the Brexit announcement. The importance of this level I have mentioned in previous reports. The big positive for our market is that it has continued higher this week.
Recent events prove that the world can be in turmoil, Britain can exit the European Union, Chinese growth can be slowing, and Australian politics can stand on its head, and yet our market will continue on its path and do what itís going to do.
I did say prior to the election, regardless of the way the Australian people voted that our market was still likely to rise. But some didnít listen, instead they were listening to the messages designed to keep you as part of the herd. They went with the masses and focused on the fear, not the opportunity these events often create.
So far this week, the market has broken another level of resistance at around 5400 points and therefore it is likely for Australian shares to continue higher this year, towards the first target I mentioned some time ago between 5600 and 5800 points.
Simple Money Management
The important thing for investors is to have a consistent approach to managing your investments and over time this will pay off. Many stocks have shown, over the past couple of years, and particularly mining and energy companies, how important it is to have stop losses set for every position you hold in your portfolio.
This is a simple money management principle that limits your risk on each share investment. I teach my students (link) this principle and it is adopted for every share my team and I buy for the Direct Equity Managed Account Service we run.
You see, investing well is not just about returns, itís about what you donít lose. Many mining and resources stocks have lost almost their entire value, and therefore it will take years to recover what has been lost, when the money could have been put into shares that are rising.
Dale Gillham is Chief Analyst at Wealth Within