Does a forklift driver know more about a balanced portfolio than a super fund CEO?: Mark Bouris

During the week we saw the curious discrepancy between the views of the CEO of Australian Super and the outlook of a forklift driver.

The 62-year-old forklift driver from Melbourne had put $80,000 of his savings with Australian Super in its default, “balanced” option. He couldn’t work out why the TV ads showed his fund on the fast escalator when over the last three years the Australian Super “default” option returned savers just 1.7% per annum.

Aus Super’s “balanced” fund is not really balanced. It has half of its portfolio allocated to local and global shares, which carry very high risk. It puts another 29% of the portfolio into risky unlisted “private equity” and “direct property”. And it has just 2% invested in cash and 9% in bonds.

In defending the fund’s performance, the Aus Super CEO argued, “the reason that most funds, including ours, have most of their assets in equities is that over the past 100 years equities have proven to be the best-performing asset class”.'

I have a few problems with this thinking.

For a start, the Australian Stock Exchange was only formed in 1987, and unbiased data on Australian stocks prior to the 1970s is hard to come by because businesses that go bust and de-list from the stock exchange often get removed from the index.

Secondly, to use performance of an asset over a century seems almost useless for people nearing retirement. They don’t have 100 years for the peaks and troughs to flatten out.

In recent weeks I have been writing about the worrying lack of good bond investment options for retirement savers. Government and corporate bonds are much less risky that equities, yet they perform just as well.

Compare the total returns delivered by 10-year Australian government bonds with the returns provided by Australian shares (plus dividends). The returns are little different over the last 30 years, with one important exception: bonds had significantly less risk of loss.

Shares have a very important role to play in most investment portfolios, and I am optimistic about the outlook for the Australian share market.

But getting the right mix of assets is crucial.

If you are over the age of 50 and you’re in the “default” option in your super fund, it’s highly likely that no more than 11% of all your money is in cash and bonds. Yet the optimal bond-allocation for you is certainly far higher.

So, what can you do?

You could look at a self-managed super fund (SMSF) or you could tell your fund how you want your money invested.

Either way, use this ready-reckoner: if you’re 20, no more than 20% in bonds and cash; if you’re 50, no more than 50% in bonds and cash, on so on.

You should always get expert advice. But you can also start by ensuring your risk profile is matched to your age.

 Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance. He runs a Q&A session on Twitter every Monday afternoon at 4pm for small business owners using the hashtag #bizQandA.