SMSF is it a superpower OR Kryptonite? … and January 2021 – End of Month Update

Image from Finfit Wealth Solutions

Slack Investor hasn’t written much about Self Managed Super Funds (SMSF’s) despite his love affair with his own fund. SMSF’s are only found in Australia and represent a “hands on” way to accumulate, nurture, and eventually release your super funds as a pension or lump sum. They have the same status as a normal retail or industry super fund (e.g. Australian Super) but they are “self managed” and give the trustees (members of the fund) power over where the fund is invested. This control is a double edged sword, as it is also possible to destroy your super wealth with a SMSF by making unwise investments.

SMSF’s offer

  • Control
  • Flexibility in investments – But this can be dangerous!
  • Estate Planning and Taxation advantages

There are nearly 600,000 SMSFs in Australia with over a million member (March 2020). Although this represents less than 5% of Australia’s population, about 25% of the $2.7 trillion invested in superannuation is invested in SMSF’s. The average member balance for an SMSF was a whopping $678,621 (ATO Data 2018).

It is possible to structure an SMSF so that the investment fees are very low. A surprising finding from a SuperConcepts study was that the average annual expense ratio for SMSF’s was 2.8% for the  over 20000 funds surveyed. This seems particularly high when compared to the Slack Investor SMSF portfolio expense ratio of 0.12%  through a “no advice” online SMSF services provider like e-superfund. This suggests that most of the funds surveyed used the relatively high cost route of engaging an accountant to administer the fund. There are many SMSF providers – Slack Investor uses e-superfund which provides the legal structure and web-based audits and education. The yearly operating expenses are an amazingly low $999. The SMSF is so integral to Slack Investor’s strategy that I have set aside an SMSF page on the Slack Investor site – Alas, there is not much on there yet … but it will come!

Rainmaker are producing monthly comparisons of SMSF’s with the larger low cost My Super products offered by Industry and Retail Super Funds. The analysis can be found on their Superguard360 site.

SG360Jun17_2
A comparison of the Asset mix of SMSF funds (left column) with MySuper funds – From Superguard360

SMSF funds (above left) traditionally hold more cash, property and less international shares than the larger Industry/Retail funds (My Super – above right). SMSF’s have outperformed MySuper since the GFC (see below, SMSF’s Blue line, My Super Red block). However, with the recovery of equities, the MySuper funds have been catching up and as at June 2017, 10-year returns from both types of funds are near identical at 4.2%. Under current asset allocations, the more diversified Industry and retail funds should overtake SMSF performance – on average.

SG360Jun17_1
Comparison of how SMSF’s (Blue Line) have done , on average, against the default My Super Fund Index (Red Block) – From Superguard360

Self Managed Super is NOT for Everyone

“… That a little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”

From an anonymous author, published in 1698 as The Mystery of Phanaticism

Running a SMSF takes time and I wouldn’t recommend it to anyone that doesn’t want to be fully engaged with their financial future. Luckily, Slack Investor finds the whole finance and ATO compliance scene most interesting. Trustees of SMSF’s are held responsible for compliance with super and tax laws and there are many other risks in running a SMSF fund. A long term study of SMSF data by SuperConcepts, “When Size Matters” found that that SMSF’s below $200000 in total funds generally underperformed. However, the larger SMSF’s were comparable in performance with industry funds.

Over 10 years, there’s hardly any difference between the performance of not-for-profit funds, such as industry funds, and DIY (SMSF) funds.

SMH article (2017) summarising Rainmaker data from the ATO

Despite how well an SMSF style really suits Slack Investor – The large majority of people should not get into an SMSF – but stick with a good performing Industry Fund. Unless you are justifiably confident in your investing abilities, most people will be better of with a well diversified industry fund for long-term Super performance. It is always better to “have low and humble thoughts of ourselves” – it is too easy to destroy the value of your hard earned super.

January 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

Some tested COVID-19 vaccinations have started to be rolled out internationally – but uncertainty prevails. Slack Investor followed markets all fluctuated but, overall, remained pretty flat this month. For January 2021, the Australian ASX 200 rose 0.3%, the S&P 500 fell 1.1%, and the FTSE 100 down 0.8%.

All Index pages and charts  have been updated to reflect the monthly changes – (ASX IndexUK IndexUS Index).

2021 Lets talk about the planet – ESG Sustainable investing

Oooh … this planet is hot!

The difference in mean (average) temperature for the year 2020 and the 30-year average temperature between 1981 and2010 – Sourced from the World Meteorological Organization (WMO)

This is just last year … and the red colours show where planet Earth has been hotter than the long term average temperature. Clearly, for most of the world, 2020 was between 1°C and 5°C warmer than would be expected from the long term average. The reason this is happening is almost certainly due to increases in greenhouse gases since the industrial revolution.

… there’s a more than 95 percent probability that human activities over the past 50 years have warmed our planet.

From climate.nasa.gov based upon the Fifth Assessment Report Intergovernmental Panel on Climate Change (IPCC)

Another way to visualize the warming is to have a look at the past 110 years in Australia. The last decade was the hottest on record with temperatures almost 1 °C above average and one third of a degree warmer than the previous decade.

110 years of Australian Temperatures with warmer tempearatures represented by the yellow, orange and reds. These maps show the anomaly of mean temperature for each calendar year, compared to the average over the standard reference period of 1961–1990. From the Bureau of Meteorology. The full beauty of this chart can be found in the pdf form of the image.

This is not a political view – but is just science. The world is getting warmer and more and more people and governments think we should do something about it.

The world’s leading climate scientists have warned there is only 10 years for us to act if global warming to be kept to a maximum of 1.5°C. If temperatures go beyond this by even even half a degree, this will significantly worsen the risks of drought, floods, extreme heat and poverty for hundreds of millions of people.

Slack Investor has tried to do his little bit in reducing his CO2 emission- but admittedly, I could do more. In addition to his puny personal efforts, by marshalling the the power of his investments, this might have greater consequences. He is not alone in this thinking.

Environmental, Social and Governance (ESG) principles

ESG has become a bit of a buzz acronym in corporate and investing circles and is linked with a set of factors associated with “responsible” or “sustainable” company behaviour. Global Warming (or Climate Change) is just one of these ESG issues – but Climate Change is the highest priority ESG issue facing investors.

Examples of ESG Issues – From Principles for Responsible Investment

To invest according to ESG principles is to undertake to exclude companies in their portfolios considered to be doing harm to the world, and often positively skew their portfolio weightings in favour of companies deemed to be doing good.

From the Sydney Morning Herald

A recent investment development has been the collection of environmental, social, and governance data. There are agencies such as Ethisphere and MCSI that rate publicly listed companies on their resilience to long-term ESG risks. But, most people just select a “Sustainable” or “Ethical” or ESG fund and let the fund manager do the company selecting.

Ethical Investing … its a murky world … but worth it!

While getting into an ethical investing fund or ETF is straightforward. Behind the door of each fund, picking which company gets into the fund sets up all kinds of dilemmas. The company selection process seems to be a bit of a “dark” art and can be done by positive screening (e.g, High ESG scores); or, negative screening with the exclusion of industries such as armaments, tobacco, gambling or thermal coal production. Screening might also be done at the company level, for instance, to exclude a mining company might have a dodgy environmental history. Each fund seems to have a different methodology. We hope that the fund managers get it mostly right. The sustainable/ESG funds that I looked at seemed to be dominated by Technology, Financial and Healthcare companies – these are the type of companies that Slack Investor invests in already. But mining companies should not be dismissed in this sustainable search as they will help enable the transition to the low carbon economy – but they too must rethink many of their practices and decarbonize production and reduce water usage.

… renewables power sources are built from non-renewable materials produced by businesses that tend to have larger carbon footprints and low ESG ratings. Mining firms produce many of the critical materials necessary to transition to a low carbon economy.

From Massif Capital – Failure to Impact (PDF):

For example, Massif Capital cite that to build a 400 kg lithium-Ion battery that might be found in most electric vehicles requires roughly 10 kg of lithium, 12 kg of cobalt, 24 kg of nickel, 36 kg of copper, 44 kg of graphite, and 160 kg of steel, aluminium, and various plastic components.

Sustainable Funds are Taking Off

It is not just the recent extreme weather related events such as the 2019 heat wave in Europe, or the recent fire events in Australia and California. There seems to be a surge in the amount of money coming into sustainable funds as investors are starting to think about climate change and sustainability and how this affects their investments.

sustainable funds estimated quarterly inflows
Quarterly fund inflows into sustainable funds. There has been a fourfold increase in assets that flowed into sustainable funds in the US last year – From Morningstar … A Tipping Point

A move towards sustainable investing can be done through your super fund. Each super fund will have some sort of sustainable option for your superannuation money. Or, you could invest directly through a managed fund or an Exchange Traded Fund (ETF).

If you don’t want to buy individual companies and research how sustainable/ethical each company is, I like the ETF approach and would look at ETF’s like Vanguard Ethically Conscious International Shares Index ETF (VESG) for International ethical exposure. It has a spankingly good low management fee of 0.18%. For local products, I couldn’t go past the SPDR S&P/ASX 200 ESG Fund ETF (E200). This ETF has only been going 5 months and has been doing well. It also has a low management fee of 0.13%

Move towards sustainable – and feel good about yourself – and we might just save this planet.

Golden Triangle of Happiness … and December 2020 – End of Month Update

After just going through a Christmas period where, in these COVID-19 times, I was lucky enough to spend time with some family – I was struck with an unusual contentment. It is easy to get bogged down with the day to day challenges of life, but Slack Investor occasionally gets self reflective and has long realised that he is a happy bloke. This state is much sought after and it often doesn’t naturally happen. A recent publication that has lodged in my tiny brain is the Australian Wellbeing Index. This research has been conducted twice a year over the last 15 years and involves more than 60,000 participants.

Personal wellbeing appears to increase with age, with some of the happiest Australians aged 65 and over.

Australian Wellbeing Index – 2019 Joint Research between Deakin University and Australian Unity.

The latest instalment of one of Australia’s largest wellbeing surveys has found that, besides genetics, there are three simple indicators of a happy life. Financial security, a sense of purpose in life, and good personal relationships make up the “golden triangle” of happiness. The full report can be found here.

well-being2
Source: thenewdaily.com.au

Financial Security

This is really what this blog posts mostly about – so I wont expand too much here. But if you feel that you are in control of your money then you can avoid many of the financial stresses. While having money does not make you happy, if you don’t have any, it can make you miserable. Not surprisingly, the survey found that the feeling of wellbeing gradually rises for household earnings up to about $100,000 a year. Surprisingly, earnings over this point found the relationship between happiness and wealth drops off dramatically.

Relationships

… the people who fared the best were the people who leaned into relationships, with family, with friends, with community,”

Dr. Robert Waldinger , Harvard University

We are humans and (mostly) social creatures – a sharing of your life and having someone who cares about you makes you feel better about yourself. A Harvard study that has been going for 80 years found that people who are more socially connected to family, friends, or community are “happier, they’re physically healthier and they live longer than people who are less well connected,” 

“It doesn’t need to be a sexual relationship, but it needs to be an emotionally intimate relationship where you can share troubles and sorrows and joys,”

Prof Bob Cummins, Deakin University

Sense of Purpose

Something to do … your get up in the morning and you have a project, part time job, volunteering, exercise, a hobby – but it is something! People are happier when they are active.

But, beyond the “golden triangle” of happiness, there are other approaches – Rather than take on each corner of the triangle, just try to just make little micro changes to your life – Perhaps a little more exercise, or contact an old friend …

An older friend once pointed out to me that we were lucky enough to have choices with our lives. He stressed our limited life span and suggested I make a list of the things that I really liked doing – and then try to engineer my life to maximise these good things and then minimise the other, less enjoyable. but necessary stuff. When you collect all the moments that make you happy … you might just … be happy!

Spend more time with people you like, get outdoors a bit more, listen to some music, have some new experiences, help other people …

“Happiness thinker” Professor Paul Dolan

December 2020 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed overseas markets this month had rises (ASX 200 +1.1%; FTSE 100 +3.1%; S&P 500 +3.7%).

I still remain nervous about the US market with its high valuations. The closing value of the S&P 500 (3756) is now 18% above the current stop loss at 3200. If the margin gets to 20% (UPR LIMIT 3840)), then I will find a place to move my stop loss upward. In these uncertain times, I will monitor my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.

S&P 500 Monthly chart December31 2020- From incrediblecharts.com

All Index pages and charts  have been updated to reflect the monthly changes – (ASX IndexUK IndexUS Index). The quarterly updates to the Slack Portfolio have also been completed.