Unconventional wisdom: My new super approach
After months of procrastination I’ve finally made a change to my super.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: My new super approach
“Whenever you’re making an important decision, first ask if it gets you closer to your goals or farther away. If the answer is closer, pull the trigger. If it’s farther away, make a different choice. Conscious choice making is a critical step in making your dreams a reality.”
- Jillian Michaels
What gets lost in the often-passionate debates about different investing topics is that in many cases there is no right answer. The best choice for me is not the best choice for someone else.
Everyone has different financial circumstances, different goals, different interests and different temperaments. Modelling various scenarios is essential as an input into decision making. But the maths alone can’t supply the answer.
Part of this is because too many assumptions must be made about future events that are unknowable. But part is because life is a series of trade-offs that often involve a financial component – should I take an Uber or public transport? Should I bring my lunch or eat out?
These decisions are subjective as we are balancing a financial commitment with our own assessment of the relative value of that spending vs. other things we could spend money on.
I don’t think most people are great at making these trade-offs. I often see a disconnect between what people tell me is important and how they structure their lives. They say they want to retire early but don’t save money. They tell me they live for experiences but sit at home because of the payments on their expensive car.
The life we live – like our investing outcomes – is the accumulated result of the decisions we make. Most of these decisions seem inconsequential but add up over time. Forming good habits is critical to success. But the big decisions are the ones that you can’t afford to screw up. Those are the ones that will have the biggest impact.
Super will play a consequential role in many people’s lives. But the super related investment decisions fall into a relative hierarchy. I’ve come up with four categories of decisions and ranked them as follows. I would love to hear your view and which you can provide here.
- Asset allocation: This is by far the largest driver of long-term returns. I’ve long argued that too many Australians are in the balanced pre-mixed option (90% of AussieSuper members). If you get the mix right in your portfolio you are halfway home.
- Contributions: The compulsory nature of super makes how much you save less important than in a non-compulsory scheme. However, the self-employed must choose to contribute to super and the mandatory compulsory super rate of 12% is less than I would recommend saving. Additional concessional and non-concessional contributions is a key decision point for investors.
- Security selection: The decision here is what investments to pick or which pre-mixed super fund to select. In a SMSF security selection takes on greater importance. You can make huge mistakes or shoot the lights out. Given their similarity deciding between pre-mixed options is less consequential.
- Fees: For pre-mixed options fee are more important than picking the right super fund. Given the range of investment outcomes for SMSFs I have reluctantly ranked fees last in my hierarchy. The fees you pay are completely in your control. They add up over time.
Applying the hierarchy to my own situation
When I moved to Australia I had only a moderate amount of interest in super. I always thought I would move back to the US. Given the high tax to withdrawal super and move out of Australia it didn’t seem like something that should occupy much of my headspace.
I picked the AustralianSuper high growth option. Easy enough. The importance of super increased once I decided that Australia was now home and I became a citizen. I’m making a switch now for three main reasons.
Transparency: I’m tired of the lack of transparency into what I am investing in and the valuation approach for private assets.
Fees: I think the fees are too high for pre-mixed options. AustralianSuper lowered their fees as I was writing this article. Good for them. But I’m still paying 0.53% for investment and transaction fees in addition to the admin fee.
Government meddling: Recent comments from the government about super funds investing in clean energy and housing worry me. To be fair the super funds have resisted these suggestions but this was the impetus to make a change which I outlined in this article.
How I thought about my decision
I’ve outlined my view on the decision hierarchy for super. Before getting into the detail I eliminated a SMSF from consideration. This wasn’t an easy choice but the right one for me – at this point.
I regularly share that I pursue an income investing strategy. This is the interesting part of my investment strategy. And in saying that I acknowledge that ‘interesting’ is often not a good thing in investing.
There are several reasons I pursue an income investing strategy. It intellectual appeals to me. It consistent with my structural and behavioural edge or competitive advantage as an investor. And it is practical. I want my financial resources to make my life better now so I spend a portion of my dividend income.
Retirement is different. I can’t touch super right now. The rules around distributions influence investment strategy. The restrictions on when and how I access super means it makes sense to have a different strategy that is designed to fit the constraints.
I’m comfortable using broad-based passive investments in my retirement accounts. This differs from the individual shares and factor ETFs I use in my non-retirement accounts. I see no issue with this bifurcated strategy. Investing is a tool. Different tools are appropriate for different jobs.
I’m a-typical to some investors as super makes up a small portion of my overall investable assets. How I invest super is less consequential for me.
The reason I didn’t pick a SMSF is the time commitment. I enjoy the process of investing. I see it is an intellectual challenge. I infrequently trade but I enjoy reading about markets and different investment opportunities. I don’t enjoy paperwork. I’m not particularly organised. I’m busy.
I don’t feel a sense of urgency to jump to a SMSF. Given my current super balance the savings will be negligible. For my super investment strategy the abundant choice offered by a SMSF is unnecessary. I will establish a SMSF well before my retirement. But at this stage of life the additional admin is something I’m happy to avoid.
That leave two remaining choices with AustralianSuper:
- A do it yourself (“DIY”) option where I set my asset allocation from a mix of Australian shares, international shares, diversified fixed interest and cash.
- A member direct option which allows me to choose ASX 300 shares, ETFs and LICs.
I will run those two options through my hierarchy of decision making.
Asset allocation
The current allocation to growth in my super is 86.10%. I would rather hold assets with low returns like cash outside of super and assets like shares with higher returns in the favourable tax environment of super. I will increase the growth allocatioin either way as both the DIY option and the member direct option allow customisation.
Contributions
Neither option impacts how much I put into super.
Security selection
This is a difference between the two options. In the DIY option I select the asset allocation but within each allocation funds are actively managed.
I want Australian shares and global shares. Our recent research report on AustralianSuper outlines their approach:
“Australian equities are primarily managed in-house using an active, low-turnover approach focused on the top 20 ASX-listed stocks. However, the portfolio is nearing capacity, which may limit alpha potential if allocations increase. Most international equities remain externally managed, though the structure is evolving toward a more diversified strategy with internalization expected to rise over time.”
For Australian shares our analyst is saying that AustralianSuper is so big that their options in the relatively small Australian market are limited by their size.
If they continue to actively manage Australian shares they will become a closet indexer. I don’t want to pay active fees for a passive strategy. The past performance has been great and exceeded the benchmark. But I’m worried about the future.
On the international side they are shifting from mostly using external managers to internally managing the money. I avoid using actively managed products in my own portfolio so either way I don’t like this approach.
For the member direct option I can pick anything listed on the ASX. My choice would be one passively managed global ETF and one passively managed Australian share ETF. Easy enough.
Fees
There are multiple sets of fees that I will have to pay with either option. The admin fee is the same. No need to explore that.
For the DIY option I will pay an investment and transaction fee. The combined investment and transaction fee is 0.16% for Australian shares and 0.36% for global shares.
The member direct option charges $13 for each trade. My plan is to trade once a month alternating between global and Aussie shares when my employer makes a contribution. That is $156 a year. A portfolio administration fee is $180 a year.
The fee question comes down to the differences between the actively managed DIY options and the broad based passive ETFs I would consider.
For Australian shares I could pay 0.07% to invest in the Vanguard Australian Shares ETF (ASX: VAS) which tracks the ASX 300. Or I could buy an ETF that tracks the ASX 200 and pay 0.05% for the iShares Core S&P/ASX 200 ETF (ASX: IOZ) or 0.04% for the BetaShares Australia 200 ETF (ASX: 200).
On the global side I could pay 0.18% for the Vanguard MSCI Intl ETF (ASX: VGS) which tracks the MSCI World ex-AU index or 0.08% for the Betashares Global Shares ETF (ASX: BCBL) which tracks the Solactive GBS Developed Markets ex AU index.
The passive ETFs are meaningfully cheaper. My account balance is large enough for those savings to make up for the transaction costs and portfolio administration fee for member direct. Both options are cheaper than what I’m paying now.
Final thoughts
I have decided to switch to member direct. The deciding factor was the lower fees and my doubts about active management – especially for such a large super fund.
The point of going through this process was not to suggest anyone should follow my lead. It was merely illustrative of an attempt at structured decision making by defining criteria – both personal and objective – and going through a step by step evaluation process. Hopefully that is the lesson that readers can take away.
Email me at mark.lamonica1@morningstar.com with your thoughts and share your approach to super here.
I have a favour to ask
The book Shani and I wrote is currently in presale which is an important time to show our publisher and book retailers there is interest. If anyone would like to support this project you can buy the book now. Thanks in advance!
Our book Invest Your Way will be released by Wiley on October 9th in Australia.
Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.
Get Mark’s insights in your inbox
Read more of Mark’s articles
Read previous editions of Unconventional wisdom
What i’ve been eating
Maine lobster tops my crustacean chart. But I’m not about to turn down some marron from WA. I go to Palazzo Salato on Clarence Street in Sydney for pasta. And the pasta is very good. On my latest trip a bonus was the marron alla griglia with yuzu butter and samphire. The yuzu adds some tartness to the butter and samphire - a mainstay of bush tucker - adds some saltiness.
