(03) 9020 2905Everyone with an opinion loves to be able to say “I told you so”. Hey, it’s fun. Who would ever tire of getting predictions right?
If you had the power to predict, would you use it for evil? Much as I’d want to think I’d only use it for good, I’m pretty sure, at least occasionally, I’d use it to make fortunes from predicting stock market crashes, like David Wenham’s character in “The Bank”.
But no-one can, consistently, see the financial future. Some get lucky a few times and look like geniuses. But they’ll get it wrong just as often.
Which brings me to Ken Henry and David Murray. Respectively, the former heads of Treasury and the Future Fund.
They want more super money invested in fixed interest (aka bonds). Had you done so five years ago, your super funds wouldn’t be looking anaemic, you’d actually be cheering. Fantastic stuff is 20/20 hindsight.
But the golden rule about “told you so” is making the prediction before it happened. On that front, both Henry and Murray fail.
Claiming now that super funds are overweight shares and property has all the hallmarks of a smirky, know-it-all, psychic. (“I can see a deep pain in your past …”)
To be fair, neither Henry nor Murray were claiming to have “told you so”. They only sort of did. That super funds have too much in shares and not enough in fixed interest is the cause of recent super pain? Derr!
I’ve asked hundreds of people and most don’t know what “fixed interest” is. They understand cash, property and shares, but “fixed interest” is met with a stunned silence.
That’s understandable. Since the Howard government paid down government debt to almost nothing, there hasn’t been much fixed interest in Australia to invest in.
And that was Ken Henry’s point. He wants super funds to help grow the bond market.
Fixed interest is one of the four main asset classes. It’s considered riskier than cash, but less risky than property and shares.
In order to explain fixed interest, let me give you a quick refresher on “cash”.
Cash is you giving your money to a bank. The bank then lends it to people to buy homes and companies to expand. The bank takes the main risk. You receive a relatively small reward for your negligible risk.
Fixed interest is the next step up the risk chain. You become the lender. You loan money directly to companies and governments.
Obviously, it’s a bigger risk than cash, in that you might not get all of your money back if the government, company or economy turns particularly sour. You’d expect a better return than cash for that risk. Okay?
What you also might not know is that you probably have a fair whack of your super already invested in fixed interest.
About 80 per cent of Australians’ super is sitting in default balanced funds. There, about 25-40 per cent is invested in fixed interest.
Uncles Ken and David reckon argue more should be in fixed interest, as the returns are less volatile and more predictable than shares and property.
In Europe, apparently, they have far higher general allocations to fixed interest. I wonder how that’s working for them right now, with the government bonds of Portugal, Italy, Ireland, Greece and Spain worth only a little more than the odds for whoever is playing Greater Western Sydney next.
Super funds are behemoths that invest by committee. So, the important thing is … how much should YOU have in fixed interest. You can make your decision faster.
Generally, the older you are, the more you should have in fixed interest and cash (considered “income” investments). The younger you are, the more you should have in shares and property (or “growth” assets).
There’s an old rule that says subtract your age from 100 and that is the percentage of your super that you should have in property and shares. The rest should be in cash and fixed interest. If you’re 40, therefore, 60 per cent should be in growth assets.
I think that’s a little conservative. Perhaps subtract your age from 110.
But beware. While the returns from fixed interest have been great in recent times, they’re also cyclical and will also go through periods of underperformance as an asset class.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au.