Discipline can save the day

Anyone expecting investment markets to make up for their lack of savings discipline in achieving a comfortable retirement is deluding themselves. Superannuation funds are not again going to be making the high single-digit returns year after year that they did before the GFC.

Anyone expecting investment markets to make up for their lack of savings discipline in achieving a comfortable retirement is deluding themselves. Superannuation funds are not again going to be making the high single-digit returns year after year that they did before the GFC.

The new reality of lower returns has to be factored into retirement savings calculations if enough is to be saved for a comfortable retirement.

The key component of most super returns is Australian shares. The typical default option has an exposure of about 30 per cent to the domestic sharemarket, the biggest exposure to any asset class.

Also, a further 20 per cent is invested in international shares to give a total exposure to shares of about 50 per cent in the "balanced" super options that most people have.

Australian shares finished last year in the red and so did super funds, with the median-performing balanced investment option losing about 2 per cent for the year. And the reason for that loss was Australian shares. The year started out brightly for domestic shares and many dared to believe the GFC was finally behind us. But the optimism soon gave way to renewed concerns about European debt. The market, as measured by the S&P/ASX 300 accumulation index (which includes dividends), went on to lose 13 per cent to the end of September. Australian shares rallied in October with a return of 7 per cent before turning down once again, ending the year down 11 per cent from where it started.

Despite Australia having one of the best-performing economies in the world, the worsening European debt crisis and the high Australian dollar kept demand for Australian shares from overseas investors low. It was the mining sector, mostly because of lower commodities prices, that was the biggest negative in the performance of the sharemarket. BHP Billiton shares started the year about $45 and ended the year about $35. Rio Tinto started the year about $85 and finished the year about $60.

The share prices of the big four banks finished the year where they started. The best-performing sector was telecom services, driven by the performance of Telstra, whose share price was about 30 per cent higher at the end of the year.

According to the latest Mercer survey of fund manager performances, from which this sharemarket data is taken, last year was only the second year Australian shares underperformed international shares. In local currency terms, global shares finished the year almost 2 per cent down.

This year could well be better for Australian shares and for super fund returns. Australian companies have healthy balance sheets and share prices could hardly be much cheaper. But Europe is still in need of a credible solution to its debt crisis. And even when Europe gets its act together, do not expect Australian shares to provide a get-out-of-jail-free card for super savers.

Those saving for a comfortable retirement need to save more through voluntary super contributions.