Your money's better off in your pocket
Whatever happens in Europe, we can take comfort knowing that our money is being handled by experts who know what they're doing. They do, don't they, because it's about to become even more important.
Whatever happens in Europe, we can take comfort knowing that our money is being handled by experts who know what they're doing. They do, don't they, because it's about to become even more important.Wilful blindness by the government and spinelessness by the opposition have ensured the amount of super we are forced to hand over to money managers will climb from 9 per cent to 12 per cent of our salaries by the end of the decade (unless we run our own funds, something that wouldn't happen on a large scale and would be unmanageable if it did).Many of us will have to take out bigger mortgages and hold them for longer than we otherwise would have in order to feed the money-management machine we won't have the income we would have had to pay mortgages off.Henry recommended against it. He didn't buy the fiction that the extra super contributions would come from employers (who would presumably get them from thin air). It will come out of future wage increases, giving us less control over what should be our own money and giving fund managers more.The Coalition opposed the move for the right reasons: it is financially reckless, costing more in tax concessions than will be raised by the mining tax intended to fund it, and it is paternalistic on a scale that makes mandatory precommitment for pokies look inoffensive.And then it backed down. It'll tear apart the carbon tax but, according to Abbott, "retirement incomes are a significant issue, particularly with an ageing population, and that's why the Coalition has decided that we won't rescind the legislation".Which pushes us into the hands of fund managers, who might just be worth their fees if they could get us a better return than we could get by paying off our homes the latest SuperRatings table shows they can't.For the past five years, the median balanced fund has returned an average of just 0.92 per cent per year. Over the past 10 years the return has averaged 5.16 per cent. Since compulsory super began back in 1992, the return has averaged 6 per cent. None match the return from paying off a mortgage.Rewarded with generous fees and a legislatively directed flow of our money into their hands, it would be reasonable to imagine fund managers have something special. Nobel Prize-winning psychologist Daniel Kahneman calls it the "illusion of skill" and saves a special place for them in his new book Thinking, Fast and Slow.He says when the University of California Berkeley professor Terry Odean examined the trading records of 10,000 private investors over a seven-year period, he found that, on average, the shares the traders sold did better than those they bought, by a very wide margin of 3.2 percentage points. Private traders sell good stocks to lock in gains and are reluctant to sell bad ones and realise losses.The winners, on the other side of trades, are fund managers. But that doesn't mean they are especially skilled. As Kahneman says: "The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, the rankings will be more stable."Study after study over 50 years has failed to find any significant year-to-year correlation in the performance of US fund managers. Some do well for a while, some do badly, but no more so than would be expected by chance. In Kahneman's words: "For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker."Fund managers don't see themselves that way. Like most of us, they think they're better than average. "The subjective experience of traders is that they are making sensible educated guesses in a situation of great uncertainty," Kahneman says.But if their guesses turn out to be no better than blind guesses over time, I don't feel particularly good about entrusting my financial future to them, nor do I feel good about handing over more firstname.lastname@example.org