Protecting Your Superannuation
by Matthew Ford 8th July 2020 (first posted 17st
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Download the free software ProtectYourSuper2_2_1.jar
and pdf documentation.
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 give my superannuation protection 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. I use the software provided here to give me superannuation protection.
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.
I find that my appetite for risk is not as large as I
thought it was so I have switched to 50% Balanced and 50% Cash. The
new Risk Your Super method aims to stay in 'shares' as long as
possible and only switches to 'cash' when the All Ords fall by
greater than 10% from the last high (since switching to shares). The
difficulty with this is being able to emotionally take the 'loss' and
switch to 'cash'. Looking at taking a 10% loss, it can be a very hard
to make the decision to take the loss and the temptation is to just
ignore the problem and not switch to 'cash'. That would leave me at
risk of even more losses.
SO I mitigate the difficulty in 'pulling the trigger' (switching to 'cash') by reducing the both the % of my super invested in 'shares' AND investing in Balanced instead to pure Shares. The Balance fund seems to drop only about half as much as the All Ords fall. So by only risking 50% of my super AND by investing in Balanced instead of Australian Share reduces my risk of loss to about 2.5% for a 10% drop in the All Ords. That is 10% fall in Shares is approximately 5% fall in the Balanced Fund and by only risking 50% of my super the loss is limited to 2.5%. So when the share market drops by 10% and the Risk Your Super method says I should switch out of 'shares' then I will find it much easier to accept the 2.5% loss and move to 'cash' to protect against further falls.
The choice if how much super to risk in the share market and whether to invest in Australian Shares or Balanced is a very personal decision. My choice, as explained above, is to invest 50% in Hostplus Balanced Fund and leave 50% in the Hostplus Cash Fund.
I am in the process of moving from ProtectYourSuper to RiskYourSuper. As the name suggests the RiskYourSuper approach has more risk.
ProtectYourSuper was biased toward 'cash' and only moved into shares when there was a noticeable trend upwards. However the success of ProtectYourSuper depended on there being an acceptable return when not in Shares (e.g. nominally 5%pa in cash/property). Because the alternatives to shares are currently returning ~0%, RiskYourSuper is biased towards staying in Shares and will only exit when the AllOrds drops by 10%. This means there is a higher risk to the value of my Super account when using RiskYourSuper.
Because of the higher risk, I am not committing all my Super to 100% shares. There are various way I could limit the effect a 10% drop in the AllOrds would have on the value of my Super account. The exact mix depends on when I think I will need to access my super, do I have enough cash/income to fund my expenses in the foreseeable future, etc. One way to adjust the risk would be to only put say 50% in Shares and leave the rest in Cash, so that a 10% drop would be ~5% reduction in the value of my Super account. What I have actually chosen to do is to put 25% into Shares and 75% into Balanced, so a drop of 5% in the All Ords would result in ~25% of 10% and 75% of half of 10% (based on the latest results) = ~ 6.25% reduction in the value of my Super account.
The software program for RiskYourSuper is still under development, but I will be switching back to 100% cash if the All Ords falls by 10% or more.
Download the Free Software (runs on Windows, Mac, Linux, Solaris)
Results for AustralianSuper funds since 1st July 2008
Summary of Results
Switched to Hostplus
Switching versus 100% Australian Shares since Jan 2000
My Switching Method
Step 1: Selecting the Super Fund
Step 2: Internet Access
Step 3: Deciding when to Switch
The Simple Moving Average Indicators (SMA)
Only use the Simple Moving Average Indicators when they Work
Deciding When the Switch: The Rules I Apply
Super got a lot of bad press after the 2008 GFC. 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 use 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. I have been using this method since September 2010. Prior to that I was use two similar methods but with different rules. Those methods were not a good as the one presented here. (For a comparison of the methods see this discussion.)
See here for Detailed Examples of how I apply my Switching Method
Here is a comparison of ProtectYourSuper versus AustralianSuper Balanced and AustralianSuper Australian Shares funds. The returns for all three, over the last 11 years, has averaged between 6.9% to 8.3% but as the following chart shows, the variation from year to year is markedly different. The blue squares show the average return, while the vertical bars show the range of returns over the years.
Of the three ways of investing your superannuation, ProtectYourSuper has so far shown the least variation in returns from year to year. ProtectYourSuper gives me more confidence in planning my financial future.
I have made a program available which process the downloaded share index data and does the calculations for the three rules used in this method and advises me on when to switch. The program runs on Windows, Mac, Linux and Solaris. Installation and running documentation in pdf format is also available. This program also assists in starting to use the method by suggesting when to start switching. See the pdf documentation for details.
Before discussing the method in detail, let’s look at how it would have worked since 1st July 2008 (the earliest date AustralianSuper provides detailed data for).
The Green line is the ProtectYourSuper performance switching method described switching between 100% Shares and 100% 'Cash' alternative. Because the Cash fund return is so low, currently the 'cash' alternative I am using is 100% Hostplus Property Fund, because AustralianSuper limits Property to 70% of your balance. But different 'cash' alternative have been used in the past, AustralianSuper Cash, AustralianSuper Fixed Interest, AustralianSuper DiversifiedFixed Interest.
The Blue line is the AustralianSuper's Share fund performance. The Red line is the AustralianSuper's Balanced fund performance. The Yellow (bottom) line indicates when the switches were made for the top Green line. It is high when 100% of the money is in Shares. These graphs were drawn using the data available on the AustralianSuper's web site.
The results shown here are for ProtectYourSuper using 11/33 values switching between AustralianSuper Shares and Cash between 1st July 2008 and 28th Dec 2011. Then between 28th Dec 2011 and 1st August 2012 I switched between AustralianSuper Shares and Fixed Interest. From 1st August 2012 to 2nd June 2014, the switches were between AustralianSuper Shares and DiversifiedFixedInterest. From 2nd June 2014 to 14th Jan 2019, the switches were between AustralianSuper Shares and Property (except for 26th August 2015 to 12th Oct 2015 and 11th Oct 2018 to 14th January 2019, when I switched to AustralianSuper Cash as a safety precaution). From 11th February 2020 the switches are between Hostplus Australian Shares and Hostplus Property Fund, except that the latest switch on 29th February 2020 was to 100% pure Cash Fund (Hostplus Cash Fund) as a safety precaution.
ProtectYourSuper currently switches between Hostplus
Australian Shares and Hostplus Property. This 'cash' alternative
(Hostplus Property) comes with the proviso that I will switch to 100%
Cash Fund if:-
a) the Property Fund drops by 0.5% OR
b) the share market drops by >10% OR
c) I have any worries about risks to my super
Having convinced myself that this switching method performed well, I started using it in Oct 2010 with moving average values of 15 and 30. Prior to Oct 2010 I used other versions of this switching method, see Background to Protecting your Superannuation for more details. On 15th January 2012 I made a small adjustment to the moving average values I used changing them to 11 and 33. On 22nd November 2012 I revised the definition of profit in Rule 3 which resulted in noticeable improvements in the results. On 7th April 2020 I revised Rule 3 to ignore the last switch's profit/loss if the market had fallen by >10% which showed ~10% improvement on back testing since 2008.
The results shown here are for the 11/33 values
switching between AustralianSuper Shares and Cash between 1st
July 2008 and 28th Dec 2011. Between 28th Dec
2011 and 1st August 2012 I switched between
AustralianSuper Shares and Fixed Interest. From 1st August
2012 to 2nd June 2014, the switches were between
AustralianSuper Shares and DiversifiedFixedInterest. From 2nd
June 2014 the switches were between AustralianSuper Shares and
Property, except for 26th August 2015 to
12th Oct 2015 when I switched to AustralianSuper Cash as a
safety precaution. From 11th February 2020 the switches
are between Hostplus Australian Shares and Hostplus Property Fund,
except that the latest switch on 29th
February 2020 was to 100% pure Cash Fund (Hostplus Cash Fund) as a
Currently ProtectYourSuper switches between Hostplus Australian Shares and Hostplus Property, except in case of market turmoil, like now, when I switch to 100% pure Cash for saftey.
So, in summary, a check of the Switching method over the last 15 years (since 4th July 2000) shows a relatively steady rise in value with low variability from year to year. However in the last few years the very low cash interest rate has held back the results and necessitated the use of an alternative to 'cash'. Currently this alternative is Hostplus Property. Australian Shares have recovered in the last 3 years but their volatility has mostly kept ProtectYourSuper out of shares.
AustralianSuper does not provide daily differences for prior to 1st July 2008 so to test the switching method back to January 2000, I had to use the ASX AllOrd index with no allowance for dividends. The chart below shows indicative returns for $10,000 invested in super in January 2000 using the V2.2.1 of the Switching method described here versus 100% Australian Shares. (See the footnotes for assumptions made.)
5% has been used for the Cash interest rate and 5% has been used for the Share Dividends.
The Shares_Cash line (dark Blue) is the result of investing $10,000 on 1st July 2000 and then switching between 100% cash and 100% shares using the switching method described here. As you can see the switch method manages to catch most of the significant share rises while avoiding the severe falls. The straight lines are when the switching method was in 100% cash earning 5% a year. You can also see there are long periods of time when it is just not worth the risk to be in Shares. The Yellow line at the bottom is high when the switching method is in 100% shares.
The chart is back testing
ProtectYourSuper on Hostplus versus AustralianSuper from 9th
November 2017 to 17th January 2019. Hostplus only started
publishing daily unit prices from 9th November 2017.
The red line AustralianSuper's results and the blue line is Hostplus' results for ProtectYourSuper. When the yellow line is up, ProtectYourSuper is in 100% Australian Shares. When the yellow line is down, ProtectYourSuper is in Property. In Hostplus that is 100% Property, but AustralianSuper limits Property investments to 70% of your balance so the AustralianSuper result is for 70% Property / 30% Cash fund.
The Hostplus result is noticeable better. This is due to i) a much better return for the Hostplus Property Fund (versus AustralianSuper's Property Fund) and ii) Hostplus not limiting investment in its Property Fund.
Even if Hostplus and AustralianSuper has similar returns for their Property Funds, Hostplus would still be preferred since it allows 100% to be invested in Property. See the Previous Commentaries for more info on the recent changes to AustralianSuper Property fund conditions.
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 without penalty. However AustralianSuper limits Property Fund investments to 70% of your total amount. For this reason I have moved to Hostplus Super, www.hostplus.com.au
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 daily changes free of charge, but the change is delayed by 1 day compared to AustralianSuper
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 need access to a computer with an internet connection to perform the checks described below and to advise Hostplus 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.
This step is now much simpler using the program I have provided. I now just run the program each weekend and follow the result.
If I was doing the method by hand then, each weekend, I spend a few minutes performing the checks described below and then, if necessary, use the Hostplus web site to request a switch. Hostplus then actions the switch Wednesday the following week using Tuesday's closing prices.
If I am currently 100% in Cash, I am asking myself “Is the share market going up? Should I switch to Shares and did the moving averages work last time?”. If I am currently 100% in Shares, I am asking myself “Is the share market going down? Should I switch to Cash?”.
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
The third part to the switching method is to determine when it does not work. When the share market is going sideways, as it been for most of 2010, SMA indicators like the ones used here don't work well. So the third condition to switching into 100% shares is “Would the last switch have been profitable”. In other words if the SMA11 above SMA33 and SMA33 above SMA99 was successful in making a profit last time, then use them again. If the last switch would not have made at least the 'cash' rate (5%) then don't use the moving averages to switch to shares this time, wait for a successful switch before starting to use them again.
I decide if the last switch was or would have been more profitable than 'cash' by noting the closing All Ords index on the Monday after Friday when the moving averages said to switch to Shares and then subtracting this from the Monday close after the Friday when the moving averages say to switch out of Shares. If the result is positive, ie the share market when up from the entry to exit Monday AND if the gain is more then 5% pa, then I say that switch was profitable and I can use the moving averages to next time to switch my money into Shares for real.
The chart below shows what happens if
you don't follow this rule.
This chart covers the first few years of the chart at the top of this page, but switching into Shares every time the moving averages crossed over, regardless of whether the last switch was profitable.
As the above graph shows, there are definite periods when simple moving averages do not work. If the simple moving averages did not work last time they are not likely to work this time. This third part of the switching method avoids most of those periods were using SMA does not work. The switching method I use here is to not switch to shares unless the last switch, based on the SMAs, would have been profitable.
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(11) line equals or falls below the SMA(33) line
if the Friday's SMA(33) line equals or falls below the SMA(99) 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, All Three (3) the following conditions need to be met.
the Friday's SMA(11) has to be above the SMA(33) line, indicating a short term rising market
the Friday's SMA(33) has to be above the SMA(99) line, indicating the market is going up in the longer term
the last switch based on these conditions 1 and 2 must have been
more profitable then 'cash'. (Based on the All Ordinaries closing
prices on the Monday following the switch decisions and a 5% cash
Or the market has dropped more than 10%
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.
If the last switch to Shares was not profitable and the market has not dropped more then 10%, then I stay in Cash and just note the closing index value on the next Monday and wait for next switch out signal. Again I note the closing index value on the following Monday and then see if the final index value was higher then the entry one. If the final index is higher then the entry index value by more than 5%pa then I mark that switch as a success and condition 3) is satisfied for the next time conditions 1 and 2 tell me to switch to Shares. If, on the other hand, the final index value was lower than 5%pa, then I mark that switch as a failure and mark condition 3) as not being met for the next time conditions 1 and 2 tell me to switch to Shares.
See here for Detailed Examples of how I apply my Switching Method. I use the ProtectYourSuper2_2_1.jar program to download the share data and apply these three rules.
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.
The AustralianSuper performance was calculated for the daily differences available from their website. The All Ordinaries Share data was sourced from Yahoo 7 Finance The data was processed by Java programs written by me and OpenOffice V3.2.1 was used to plot the results.
Assumptions used to produce the chart since July 2000
The Cash return was fixed at 5% per annum and dividends of 5% per annum were applied quarterly for Shares for back testing to year 2000
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 Monday.
No superannuation fund fees were deducted
The superannuation Share Fund tracks the All Ordinaries Index.
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