Super Funds: Who Will Be Your ‘Greater Fool’?
One day, you’ll trade your super fund shares for cash.
This cash will replace your income when you retire… so there’d better be plenty of it.
The shares you own are investments. Your chosen fund buys them for you when you’re working. As years turn into decades, you hand more money to your fund manager to buy more shares.
You know nothing about the companies your money is pouring into. But that’s okay. The person buying the shares on your behalf believes they’re cheap.
This person – whom you’ve most likely never met, and never will – is making a bet on your behalf. A bet that the shares will be worth more money when you come to sell them.
This is the ‘magic beans’ principle the financial services industry works according to.
Wait… did you think your fund manager knows the ins and outs of each company he buys with your dough?
Oh dear Esky Mo – they don’t do that kind of research in the big retail firms! It takes too darned long. No one has the time. It’s boring. And the fellas are teeing off at three.
They mostly use modeling to try and match the market. A few charts, some basic algorithms, company PR announcements fed to email inboxes, a dash of sentiment and (sshhh) guesswork.
Money chugs in every quarter, loaded high onto a shiny government-mandated train. It gets shoveled into different buckets. Then… golf!
Oh, you want someone to actually look at your account? Do some analysis? Make some tweaks?
Sorry old bean – those blokes are *way* more expensive. They have nicer Porsches to run and prettier wives to keep happy. They won’t touch your account unless 5% of it is enough to buy the mistress an Audi.
So, you’re stuck with the dudes down the corridor making the 50:50 bet on higher future prices.
But that’s okay, right?
I mean, it’s okay for them because it isn’t their money.
And it’s okay for you because this is their job. They do this for a living. They’re pros – right?
Would you have better luck in Vegas?
I always chuckle when I see those state-funded TV ads, warning you about the dangers of gambling.
You spend your whole working life gambling – with the most precious asset of all: your future security.
Sorry, but how can you not call super a gamble?
My guess is, you most likely don’t know the names of the companies you invest in… or anything about the industries they operate in.
You don’t know their prospects, management, debt-to-cash ratio, earnings, the risks they face or the opportunities they could exploit.
You might know some of this… if you manage your own super. But if you opted for the default fund at work, you won’t know any of it… Am I right?
I’ll also guess you most likely don’t know the person who’s betting your life savings on this ‘red or black’ outcome.
If he turned up at your house naked, except for a plywood A-frame sandwich board bearing the upper-case legend: ‘I AM YOUR SUPER FUND MANAGER’, you’d be meeting him for the first time… yes?
And so that’s a…???
But it’s not the biggest gamble you’re making…
Who will buy?
Retirement in Australia is based on the ‘greater fool’ theory.
Simply: you don’t know the real value of the investments you own within your super fund.
But you invest with an expectation…
You expect prices will rise… and you’ll be able to sell your shares later in life to someone for more money than you paid for them.
That someone is the ‘greater fool’.
There’s no question you’re going to need the cash. You can’t swap share certificates for cornflakes down at IGA.
If your super fund is set up in the same way most Australian funds are – as a (mostly) straight bet on growth – you’ll need to sell your shares for a higher price than you paid, to get enough cash to see you through retirement.
So… who will buy your shares?
I have a super fund.
Maybe I’ll take them off your hands!
Or maybe I won’t. You see, I then have to work on the assumption that the shares I buy from you will be worth more again when I sell them.
One look at the All Ords over the last eight years makes me a *teensy* bit nervous about that.
And then you’ve got to consider good ol’ supply and demand.
You see, you’re relying on there being enough ‘younger blokes’ around that at least one of them will be your ‘greater fool’ – and buy your shares for more than you paid.
Trouble is, the number of ‘younger blokes’ in Australia is shrinking, as a percentage of the total population…
Conversely, the number of older folks is growing.
According to the treasury website:
‘Quite simply, there will be many more older Australians than there are today. The number of Australians aged 65 and over is expected to increase rapidly, from around 2.5 million in 2002 to 6.2 million in 2042. That is, from around 13 per cent of the population to around 25 per cent. For Australians aged 85 and over, the growth is even more rapid, from around 300,000 in 2002 to 1.1 million in 2042.’
The ABS agrees, over the next two decades, the growth of those aged 65+ will be more than twice as fast as the growth of the total population of Australia.
Now I don’t know how old you are… but when you come to flog the contents of your super to a ‘greater fool’, you might find there are more sellers of shares relative to buyers.
This isn’t a great environment in which to realise your retirement fortune. Typically, in any market with more sellers than buyers, prices go down.
Right now, your super is most likely a bet on prices going up.
The obvious answer to this is to stop hunting for a greater fool and restructure your super so it’s not a straight bet on share price growth.
How do you do that?
Don’t ask me.
Ask my buddies at Port Phillip Publishing. They have TONS of clever investment ideas. And unlike me, they’re actually allowed to give you specific financial advice.
Next week, I’ll show you how you can get some of their smartest ideas for free…
Editor, The Escapologist