Why Keating and Henry are wrong!

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Well, as investors, what are we to do? With all the recently self-appointed investment gurus wagging their fingers at us, we have every right to be confused.

First we had Ken Henry, Special Adviser to the Prime Minister, castigating those who run their own super funds for having an excessive exposure to ‘risky’ equities. This was followed by Lindsay Tanner threatening possible government intervention if we didn’t wake up to ourselves and reduce the risk in our super funds.

Then a lone voice is raised; Glen Stevens, Governor of the Reserve Bank, suggests that retirees should be seeking better income returns by ignoring the paltry interest rates available on cash and leaning towards the superior income streams available from equities!

Now we have Martin Parkinson, Secretary to the Treasury, entering the arena and echoing both Henry and Tanner with concerns about the ‘greater’ risk associated with self-managed super funds (SMSFs). In the same article Paul Keating came out swinging; accusing super funds of investing too heavily in the stockmarket. Where were all these now negative self appointed financial experts prior to the global financial crisis (GFC)? Why weren’t their voices raised then?

What was concerning was Paul Keating’s suggestion that a 3% increase in the employer paid Super Guarantee contribution from 12% to 15% be managed within a government longevity insurance fund! From what I have seen of past governments managing money on our behalf, I shudder at the thought.

I can only think that they are pandering to the prevailing public attitudes or, worse still, they are as ignorant as many of the public. Shares are not GROWTH assets; they are income assets just like a rental property or a cash deposit. The fact that too many people focus on the price of shares is a shame but inevitable because of the liquidity provided by the stock market.

Don’t focus on price

In many presentations I have tried to curb this unhealthy focus on prices by offering an alternative view. The chart below is the All Ordinaries share index plotted monthly over 32 years. One can see the constant volatility which gives mindless speculators, day traders, hedge funds, computer trading and the media, a fertile environment for spreading their germs.

As perception is reality, let me now ask you to consider my perception of this same picture.

You will note that in both cases we arrived at exactly the same point. I have simply chosen to ignore all the dead-ends, shortcuts and deviations along the way!

In the examples above, I have simply focussed on the total value with no distinction between capital and income. I therefore make no apologies for including below another chart that I have used before. This shows the Industrial Share Index and cash broken into their two separate elements; income and capital.

Not as risky as you think

To suggest holding equities in our self-managed super fund is somehow risky is stupidity.

We have been and continue to enjoy an income stream that cash holders can only ever dream about. I acknowledge the volatility in prices, but as we are not spending the capital, it has no impact on our day-to-day lifestyle. I can think of no better ‘longevity’ insurance than this.

How do we get our ‘leaders’ to stop following daily share prices and mindless media commentary; whoops, did I really write that?

Now look at the red bars above, which show interest rates coming off a high of around 16% in the early 1990s and declining to the current low single digits: Death by a thousand cuts!

Where were all the doom and gloom commentators when the cash crash occurred? I have a suspicion that too many people suffer from the ‘boiling frog’ syndrome, and yet this is considered to be ‘prudent’ investing as opposed to risky shares? Bah humbug!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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