I NEVER feel comfortable talking negatively about superannuation. There are too many people in super, too many people riding on the performance of sharemarkets and too many retirees aghast at the state of their retirement savings for it to be an easy topic.
But these are the conversations I'm having lately: people asking when the sharemarket will return to normal people wanting a tip on the best fund manager to be with retirees who thought they would be relaxing after a lifetime of work, but instead are stressing about the slow slide of their super balance.
These past few years have been especially confusing for many Australians: they have been legislated into compulsory super but they know nothing about investing. And when they look at what the experts have done with their money, they see it going backwards, or growing very slowly.
In the decade to June last year, Australian Prudential Regulatory Authority figures show that the average return in large super funds was 3.8 per cent a year. That was the overall average retail funds gave just 2.9 per cent. After accounting for inflation, which has averaged about 3 per cent for the same period, savers have received little-to-no "real" return.
One of the standard "expert" remarks about investing is that you have to skew your super to higher-returning equities, or you won't have enough to retire on.
This assumes you can only get satisfactory returns if you take on equities' very high risk. Remember, global shares suffered 40 per cent to 50 per cent losses in 1987, 2001 and again in 2007-08.
The other extreme seems to ask you to accept very low returns on your money for little or no risk.
So, many investors sit at either end of this barbell. They can lose their money in a bear market, or realise income returns that are not high enough for their needs.
I believe in a "middle way" solution: a portfolio comprising a mix of short-term bank accounts and term deposits combined with variable or "floating-rate" bonds.
By diversifying your portfolio across these investments, you can take on low risk - not much higher than cash and much lower than equities - while receiving very attractive returns.
Amazingly, many big fund managers and most financial planners do not steer their clients into these products.
While many offer bond-based products, when you select the "default" setting in your super fund, you are usually placed in a "balanced fund", which typically gives you a total exposure to cash and bonds of not much more than 10 per cent.
In other words, the super option most Australians are in - "balanced" - will see you about 80 per cent to 90 per cent exposed to Australian shares, global shares, and "equity" risk in commercial property, private companies and hedge funds.
Recently, we came across the case of a retiree in Queensland who had $800,000 in a bank account, earning less than 2 per cent per annum. By putting his cash into a portfolio that exposed him to both institutional bank accounts and variable-rate Australian bank bonds, this retiree will earn an extra $25,000 a year.
Another instance is a Sydney family that sold an investment property and needed to park $705,000 before they bought another home in six to 12 months' time. This family was going to put the money in a bank's "bonus" savings account, paying 5.2 per cent for a few months, which then dropped to a very low 3.5 per cent. Instead, they will now likely earn an extra $9000 per annum by investing in a diversified portfolio of institutional bank bonds.
We are seeing similar developments with self-managed superannuation fund (SMSF) trustees. One SMSF trustee had $250,000 in cash, earning 3.5 per cent. He left $50,000 in the fund's transaction account and moved $200,000 into a portfolio comprising institutional bank accounts and bonds. He will probably earn an extra $3200 a year as a result.
The point I try to get across to those who are worried about retirement - or who are unhappily retired - is that they have to get their minds out of the approach of 100 per cent shares or 100 per cent bank accounts.
Why are bonds safer than shares? Think about it this way. When you buy a home, you might get a loan for 80 per cent and fund the rest with your deposit. The loan is the same as a bond while your deposit is equity (or like shares).
If you default, the bank gets to foreclose and recover its loan by selling your home before you get anything back. If your home falls in value, your deposit (or "equity") may be worth nothing. When you invest in a bank bond, you are lending money to the bank. In contrast, investing in bank shares leaves you with all the downside risk.
There are smarter solutions out there for you. Start by becoming informed, and always get advice before you act.