If more than 30% of your super is invested in the Aussie stock market your retirement could be compromised

How much of your super is invested in the Australian stock market? If it’s more than 30% then please take 3 minutes to read this blog.

Between 1995 and 2007, the average capital return on the Australian stock market was 14.5% p.a. A $100,000 invested in January 1995 would have been worth $554,000 by December 2007. Since January 2008, the average return has fallen to 4.8% p.a. (All Ordinaries Index) and over this 8-year period, your investment would have appreciated from $554,000 to $654,000.

So in the first 13 years you made over $450,000 and in the last 8 years only $100,000. That is not good news and perhaps there’s even worse news in the future… let me explain.

The Australian market lacks diversification

The ASX200 is dominated by only a few companies. The top 10 companies include the big 4 banks, Telstra, BHP, CSL, Wesfarmers, Woolworths and Scentre (Westfield). These 10 companies account for 44% of the index’s total market capitalisation. Put differently, if you invest in the ASX200 index, 44% of your money is invested in only 10 stocks. Compare this to the US market for example. The top 10 companies only account for 22% of the total market capitalisation of the top 200 companies[1]. The US market provides approximately four times more diversification than the Australian market (as 44% would be invested across 40 companies, not 10).

We have seen the impact that the lack of diversification has had on returns recently. Between January and April 2016 this year most of the bank share prices have been hammered by the market. This drags investor returns down because they are essentially over-exposed to one sector.

There’s almost no tech exposure

Only 1.32% of the ASX200 is invested in the technology sector. The technology sector has delivered very strong returns in the past 5 years (i.e. 11.89% p.a.[2]) and not having any exposure to this sector is a poor long term (asset allocation) strategy in my opinion. There has been some commentary lately that valuation multiples for tech companies are too high at the moment and if time proves this to be true, returns in the short-term might be negatively impacted. However, in the long term, it is difficult to see how companies like Apple, Microsoft, Facebook and Google (all in the top 10 US companies) won’t have a large role to play in the future economy. As such, it makes sense to have some exposure to this sector.

Commodities will probably weigh further on the Aussie stock market

The chart below was published by the RBA and sets out the commodity price index from July 1982 through to April 2016.


This chart demonstrates that commodity prices were pretty steady between 1982 and 2004. Between 2004 and 2011 the commodity index rose over 340%. Today, the index suggest that commodities are still arguably 50% overvalued (compared to the pre-commodity boom longer-term average).

In a recent presentation, Platinum Asset Management notes that Resources based earnings used to account for 1% of GDP in Australia pre-boom. It rose to 6%. It is still at 4%.

What does this all mean? There is a risk that weaker commodity prices and earnings will have an impact on the economy and the local stock market in the medium term. BHP accounts for 4% of the ASX200 index and the Materials sector accounts for 13.5%. That is a lot of money invested in a sector that might struggle in the medium term. Plus the health of this sector does impact on other sectors too.

Australia hasn’t had a recession since the early 1990’s – some 25 years ago. The NBER suggests most economies have a recession every 5 to 10 years. The longer Australia avoids recession, the more likely it is that one is just around the corner!

The lost decade and Japan’s experience – and its impact on your super?

The chart below sets out the performance of the ASX200 over the past 10 years. As you can see, it has done very little capital growth wise over this time. If you are over-invested in the Australian market (say more than 30% of your total super) and its performance doesn’t improve, that will have a big impact on your retirement savings.

Source: Interactive Data

Another risk for the Australian market is that we enter into a prolonged period of very low interest rates. Given the other pressures mentioned above, it might be very difficult for the government to stimulate economic growth. Australia, and possibly the world, might be stuck in a low or zero interest rate environment for possible the next decade and beyond. This was the flavour of the aforementioned Platinum presentation – here’s a summary by Marcus Padley. Japan has had low or zero interest rates for about 25 years and its share market has struggled over that same period of time – see chart below. If this occurs in Australia, then the lack of diversification is even more of a concern.


The solution: assume that you don’t know what the future is going to bring

Financial scholars argue that asset allocation (i.e. what asset classes to invest your money in) is an investor’s most important decision. The aim of a strategic asset allocation is to:

  1. Minimise volatility and more importantly, not lose money. Eliminating or reducing the impact of loss years is critical; and
  2. Give you the opportunity to make money in almost any economic environment.

Therefore, it is wrong to conclude from my above commentary that you shouldn’t invest in the Australian market. However, it might be wise to make adjustments to how you invest. Let me explain.

A long term asset allocation should be based on time-tested research and analysis. It should be long-term focused (i.e. a period of say 20 to 30 years). For example, we use Ray Dalio’s ‘All-weather’ asset allocation as the foundation for developing an asset allocation for our clients. A strategic asset allocation is one where you make smallish adjustments and reweighting to your long term asset allocation to account for obvious macro-economic risks. For example, at the moment we are advising clients to not have any exposure to commodities. Also, currently, we are advising our clients to be underweight Australian market and overweight US and international. These two strategic and subtle changes are made for some of the reasons I have mentioned above. They are not made because we are trying to predict what the market will do – no one can do that consistently. Instead, we stick to our long term strategy and fine tune it along the way.

Do you need help?

There are three things you need to do to maximise your super (excluding ‘contribute more’ of course) being:

  1. reduce your fees to around 0.20% p.a. (click here to read a blog from last year);
  2. ensure your money is invested passively not actively (click here for another blog); and
  3. ensure you have a smart, well thought-out asset allocation.

It’s not difficult or costly to optimise these three important things – in fact it’s quite the reverse.

We advise lots of clients on where to invest their super. Firstly, we don’t take any commissions whatsoever so our advice is conflict-free. In short, we don’t care where your super is invested – as long as it’s the best place for you (i.e. low-cost, passive and smart asset allocation).

Switching your super fund is surprisingly easy… it typically only takes a week to switch plus a quick email to your payroll department and you’re done. Just to be clear, I’m not talking about a Self-Managed Super Fund – they suit some people – but not nearly as many people that have them. There are often better, simpler and lower-cost alternatives.

If you need help with your super, do not hesitate to contact us.


[1] The top 200 companies included in the S&P 500 index

[2] Dow Jones U.S. Technology Index