Emotion and investing shouldn't mix
IT was one of those somewhat good/bad stories from Jeff Bresnahan, managing director of superannuation rating agency SuperRatings.
Bresnahan released SuperRatings’ latest performance survey this week that underlined how much the GFC and its lingering aftermath have eroded the medium and longer-term returns of balanced super fund portfolios. (SuperRatings classifies funds with 60% to 76% of their portfolios in growth assets as balanced.)
To the end of October, the median balanced super portfolio produced annualised returns of a negative 2.93% over three years and positive returns of 3.72% over five years, 6.52% over seven years and 4.96% over 10 years.
These after-fees, after-tax returns are unquestionably disappointing. However it should be said that the 6.52% over seven years is ahead of the general performance target used by many large super funds. (Most balanced funds aim at a longer-term return of 3% to 4% above inflation.)
Bresnahan adds a somewhat good news interpretation on these returns: “On effectively the third birthday since the onset of the GFC, Australians [in the median balanced fund] have seen their super [balances] climb to within 7% of their pre-GFC highs.”
His mention of the 7% figure seems to truly highlight the case for setting an appropriate strategic or long-term asset allocation and sticking with it. This is opposed to allowing emotions to drive our investment decisions and encourage us to try and time the market.
An extreme danger during the bear market low was any temptation to switch to an all-cash portfolio, thus locking-in losses.
As behavioural economists warn: Emotion and investing shouldn’t mix.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.