|
Home
| WebStringTemplates
| Java/J2EE
| Unix
| Torches
| Superannuation
|
| About
Us
|
|
|
Protecting Your Superannuation
|
by Matthew Ford 17st September 2009 (revised 6th
July 2010 – Rev.1)
© Forward Computing and
Control Pty. Ltd. NSW Australia
All rights reserved.
Unhappy with your superannuation performance, this article describes how I took back control of my super, avoided losses and made more money. I use this simple method to protect my superannuation against drops in the share market. All I needed to do was to select an appropriate super fund and to have access to the internet once a week, from the local library for example. I did not need to start my own super fund.
Legal Disclaimer: I do not hold a Financial Advisor’s Licence and nothing in this article should be considered as recommending any particular course of action to anyone else.
Switching versus 60/40 Balanced versus 100% Shares
Consistency of the Switching Method
Step 1: Selecting the Super Fund
Step 3: Deciding when to Switch
Super has been given a lot of bad press lately. Many people have seen the value of their nest egg drop dramatically. But it is not the Superannuation system that is the problem, rather it is where your money has been invested that has lead to the drop in value.
Many people are in the ‘default’ Balanced option that has a large exposure to the share market. This is good if the market is going up but not so good when it is going down. This article describes the simple steps I have been using since July 2010 to take back control of my super, stop the drop in value when the share market falls and still reap the rewards when it rises. I spend no more that a few minutes each week on it and I did it without starting my own super fund. From July 2007 to July 2010 I was using Rev.0 of this method. For a comparison of these two methods look at the plots on the respective pages and read the notes at the bottom of this page
Before discussing the method in detail, let’s look at how it would have worked since July 2000. In the following charts, the results for the Switching method described here are always shown in Blue.
This table shows the returns as of 30 June 2010 for the last 10 years, 5 years, 3 years, 1 years and 3 months.
|
|
10 years to 30/6/2010 |
5 years to 30/6/2010 |
3 years to 30/6/2010 |
1 year to 30/6/2010 |
3 months to 30/6/2010 |
|---|---|---|---|---|---|
|
Switching |
88.35% |
42.68% |
12.44% |
3.91% |
0.22% |
|
60/40 Balanced |
67.50% |
26.99% |
-2.13% |
21.95% |
-6.44% |
|
100% Australian Shares |
61.62% |
19.86% |
-16.80% |
33.26% |
-11.16% |
The chart below shows indicative returns for $10,000 invested in super in July 2000 using the Switching method described here versus 60/40 “Balanced Fund” versus 100% Australian Shares. (See the footnotes for assumptions made.)
Most superannuation is in a “Balanced Fund”. The typical Balanced fund is 60% shares and 40% Cash.
Following the super switching method discussed below, the $10,000 was switched between a 100% Cash Super Fund, returning a nominal 5%, and 100% Australian Shares Fund. The straight lines in the Switching plot are when the 100% of the balance has been switched to Cash and is getting 5%.
As the chart below shows, this method has the desirable features of sustained grow in a variety of market conditions while avoiding deep losses when the share market falls.
As
the chart and table above shows, over this time scale the Switching
method is substantially ahead of both the “Balanced Fund”
and the 100% Shares fund..
The next chart shows the performance since 1985 on a log scale.
The consistency of the Switching method is more clearly illustrated by the next three charts which shows the percentage gains (and losses) each calendar year from 2009 to 1986.
These charts show that the Switching method has more consistent results with smaller losses. While both the 'Balanced' fund and 100% Australian Shares have had more negative years and are much more variable in their results.
The lower variability of the Switching method from year to year is one of its key features as it gives me re-assurance that I can plan, each year, on having my superannuation funds available next year to support my retirement.
So, in summary, a check of the Switching method over the last 10 years (since 4th July 2000) shows a steady rise in value with low variability from year to year. And this consistency does not cost you growth. The performance table shows that over the last 10 years the Switching method is well ahead of both a Balance and 100% share fund, 88% increase in funds for the Switching method versus 67% for the Balanced Fund and 61% for the 100% shares option. (Again see the footnotes for assumptions made in producing these figures.) Having convinced myself that my switching method performed well, I started using it in July 2007. Prior to that I used Rev0 of the method.
To use this method I need to be able to regularly change where my super was invested, shares, cash etc. Many funds only allow changes to be made a few times a year. This is not often enough to allow the transfer of the super out of shares when the share market starts going down and transfer it back to shares when the market starts going up.
I found that AustralianSuper, an industry super fund, (www.australiansuper.com) allowed me to change the allocation of my super on a weekly basis with out penalty.
Email me if you find other suitable funds that provide a similar service. Make sure you check the current terms and conditions before making your choice of fund.
www.hostplus.com.au, an industry super fund, say they allow weekly changes free of charge.
www.intrustsuper.com.au ,"Intrust Super, a 100% Industry Super fund, also allow their members to switch investments weekly and at no extra charge to the member."
www.agest.com.au “We do not currently limit the number of investment switches you can make, nor do we charge a fee for making an investment switch. However, we do reserve the right to change these arrangements in the future. We will give you at least 30 days’ notice if this is to occur.”
I transferred all my super from my previous fund to AustralianSuper.
I need access to a computer with an internet connection to perform the checks described below and to advise AustralianSuper of my switch request. I have a computer and the internet at home, but could just as easily use the internet facilities at the local library or internet café.
Each weekend, I spend a few minutes performing the checks described below and then, if necessary, use the AustralianSuper web site to request a switch. AustralianSuper then actions the switch Wednesday the following week.
If I am currently 100% in Cash, I am asking myself “Is the share market going up? Should I switch to Shares?”. If I am currently 100% in Shares, I am asking myself “Is the share market going down? Should I switch to Cash?”. Initially I transferred all my super to AustralianSuper’s Cash option.
To answer the questions I use two Simple Moving Averages (SMA) indicators on the Australian All Ordinaries (au:xao), so first I will describe how I plot those indicators using BigCharts. (www.bigcharts.com). For more information on Simple Moving Averages search on the internet
To plot SMA(3), I first bring up www.bigcharts.com on my computer's web browser. At the main screen (sometimes there an advertisement I have to click through), I type in au:xao for the stock code and click on Advanced Chart. (i.e. the second button, Advanced Chart)
This brings up a chart of the Australian All Ordinaries. (shown here as taken on 16th Sept. 2009)
On the left hand side of the web page (shown above) I click on the “time frame” arrow and when the box opens I select “2 months”, “Daily”. I then click on the “indicators” arrow and choose “SMA (3-line)”, 6 and then click the Draw Chart button at the top to redraw the chart with these settings.
There
are three coloured code lines with their legend at the top of the
chart, SMA(6) yellow, SMA(12) blue and SMA(18) red. If the SMA(6)
line is above the SMA(18) line on the day I check then I take that as
an indication that the share market is going up in the short term. If
the SMA(6) line is equal or below the SMA(18) line then I think the
share market is going down and I switch all my super to Cash.
I only want to be in the share market when it is generally rising as well as going up in the short time and I want to be out of the share market when it is generally falling. As an indication of this I use a second SMA time interval of 12 (shown below)
If the SMA(12) line is above the SMA(36) on the day I check, then I think the share market is going up in the longer term. On the other hand if the SMA(12) is below or equal to the SMA(36) line then I thing the share market is going down in the longer term.
To see how this works look at the chart below
As
you can see for most of the down trend the SMA(12) line is below the
SMA(36) line. While for most of the up trend the SMA(12) is above the
SMA(36) line. That is these lines are a usefull indicator of the
direction of the market. But these lines change slowly and where they
cross is always after the top and the bottom of the market.
I don't mind being late to get back into the market when it starts to rise again but I want to get out quickly if it starts to fall. That is why I also use the SMA(6) over SMA(18) to make me switch early if the market starts to fall. The SMA(6) over SMA(18) lines move much more quickly and so cross sooner when the market starts to fall.
So now that I have shown the two sets of SMA indicators I use, here are the rules I apply to tell me when to switch from Cash to Shares and back again. I perform the following checks each weekend using the SMA values for previous Friday.
As soon as the
Friday's SMA(6) line equals or falls below the SMA(18) line
OR
if
the Friday's SMA(12) line equals or falls below the SMA(36) line.
If I have any doubt about whether or not the line is on or below the other one, I assume the worst and switch to the safety of Cash.
Here I am more cautious because having my super is shares is much more risky then getting 5% in Cash. Before I will switch my super back to 100% Shares, BOTH the two following conditions need to be met.
the Friday's SMA(12) has to be above the SMA(36) line, indicating a longer term rising market
the Friday's SMA(6) has to be above the SMA(18) line, indicating the market is going up in the short term
Again, if I have any doubt about whether or not one of the above conditions has been met, then I assume the worst and leave all my super in the safety of Cash for another week.
I have found that by selecting an appropriate super fund and using the simple rules described above, based a chart of All Ordinaries index available on the internet, that I am able to avoid heavy losses in my super over the last few years while still making gains now that the share market is recovering. I sometimes lose money switching into Shares and out again, but I catch the major rises in the market while avoiding the major falls.
Spending a few minutes once a week applying this method, lets me sleep peacefully every night when the share market goes in to a substantial decline because this method has has told me to put all my super into Cash and using this method also removes the worry about when I should put my super back into Shares as the market recovers.
Rev0 of my switching method has worked well but I started wondering if there was a better choice of values that would still protect me from downturns while allowing me to participate in more of the upturns.
About this time I also came across the historical share data available from Yahoo 7 Finance. This data goes back to August 1984. Of particular interest is that it covers the 1987 share market crash. I wrote some programs to test a number of alternative switching methods. Checking Rev0 back to 1985, I found that it lost 34% of its capital in the crash, while the method described on this page lost less than 7% in the crash.
Over the last 10 years both Rev0 and Rev1 performed about the same in % gain terms (compare the tables at the top of each page). However back testing revealed Rev1 had in a larger loss of capital in the last 10 years of 17% versus Rev0 maximum loss of 11%. That is at any one point I could be down 6% more using Rev1. But Rev1 recovers faster so the overall gain is about the same as Rev0 as noted above.
Also because Rev1 uses shorter time periods, it switches more often. Rev0 averaged about 5 switches a year while Rev1 averages about 11 switches a year.
Both methods still require that I check the charts every week. Rev1 is a little simpler to apply as it only has two conditions to check.
To summarize: Over the last 10 years, Rev1 has more variability then Rev0 and results in about twice the number of switches, while resulting in about the same gain. However Rev1 provides much better protection against a 1987 style crash and for this reason I have switched to using the method (Rev1) described on this page.
Assumptions used to produce the charts of indicative returns.
The Cash return was fixed at 5% per annum
The profit or loss was applied each time a switch was made.
A switch lodged on the weekend was executed at the closing all ordinaries index on the following Tuesday.
No dividends from the shares were applied and no superannuation fund fees were deducted
The superannuation Share Fund tracks the All Ordinaries Index.
The “Balance Fund” is 60% shares and 40% Cash and is rebalanced to 60/40 each 6 months on the first business day in January and July
Share data for these calculations was sourced from Yahoo 7 Finance
Data was processed by Java programs written by me. Plots from OpenOffice V3.2
Contact Forward Computing and Control by
©Copyright 1996-2008 Forward Computing and Control Pty. Ltd.
ACN 003 669 994