When it comes to investing, time in the market can be a more effective strategy than timing the market itself. Investment decisions often involve compromises and trade-offs that need to be made between the goal of maximising returns while minimising risk. Taking risk doesn’t always result in higher returns and sometimes identifying unrewarded risk isn’t so straightforward - the allure of strong returns can sometimes cloud an objective assessment of the likelihood of poor outcomes.
In an ideal world, investors would be able to perfectly time their investment in share markets when economic conditions are favourable and divest when conditions take a dive. However timing when markets will turn is extremely difficult and most investors who try to predict this, eventually get it wrong. It’s safe to say that repeated timing missteps will certainly erode wealth over the long term.
However people aren’t always aware of this as you may often hear in the media about outperforming companies or hear “water cooler conversations” about how well a friend or colleague’s investments have performed. This can create the perception that people are regularly having success from choosing companies or investments, however the reality is that more people lose money from trying to pick winners and time markets. After all, it’s not often you hear stories of people losing money from their poor decisions.
By the time you hear news about a market correction or market bounce in the media, it’s often too late to gain from repositioning the portfolio as the changing conditions have already been priced into sharemarkets. Whether you’re choosing shares in companies or investment options within your super fund, making an investment switch following a market bounce/correction will often lead to a worse outcome than what would have been encountered by the market movement itself.
Albert Einstein famously said: “Compound interest is the eighth wonder of the world.” Compound interest works best as a result of time, meaning the length of time in the market as opposed to timing the market, and is a much better way of building long-term wealth for most people.
Since the Superannuation Guarantee Act (SGC) was introduced in 1992 by the Keating government, the compulsory employer contribution rate has grown from 3% to 9.5% in the 27 years.
What would the results look like for an average person’s wage who has been contributing at the SGC level for the past 27 years? Based on the annual average salary of a teacher, assuming a starting salary of $30,321 in 1992, the following graph compares the outcomes of investing into the ASX 300 accumulation index (assuming no tax or franking credits) versus saving for retirement through the NGS Super default option (Diversified (MySuper)):
Both the ASX 300 and the NGS Super option have similar performance, with an approximate outcome in 2019 of $345,000 from the ASX portfolio and $380,000 from the NGS Super default option. The power of compounding starts to take real effect as the account balance grows over time.
At NGS Super, we don’t attempt to time the market, we manage the risk by constructing well-diversified portfolios that increase the likelihood of participating in rising markets while protecting wealth in falling markets. These two objectives require a different approach to building portfolios and we achieve this in two ways:
- We ensure that the array of assets diversify the exposure to share market risks - for example, diversified assets may include private equity, infrastructure, real estate, and foreign currencies. These investments provide a significant diversification benefit to our portfolios which protect against falling share markets but also do well during rising share market environments.
As an NGS Super member, you gain opportunities to invest in shares for global companies such as Amazon, Samsung, Johnson and Johnson, Mastercard, Hermes International and Nike. In the real asset portfolio, you invest in both domestic and international assets. Domestically, your portfolio includes airports such as Melbourne, Brisbane and Perth; seaports such as Port of Botany, Port of Melbourne and Port of Brisbane. There are many more examples of assets such as these across the world in sectors including: toll roads, energy distribution networks, student accommodation, carparks and windfarms. You also gain investment opportunities in the latest emerging technologies from investments made with venture capital and private equity managers.
- We adjust our asset allocation according to the prevailing economic cycle. When economic growth is positive, we increase our investment in share markets and when the prospects for growth decline, we shift more of the portfolio to defensive assets such as cash and bonds. We take a medium- to long-term view of the economic cycle so this enables us to position the portfolio ahead of published news on market events.
How has the Diversified (My Super) option performed in 2018?
In January 2018, NGS Super’s investment team along with our asset consultants identified that both the domestic and global economic environment was beginning to weaken and as a result began to reposition the portfolio to more defensive assets. The exposure to sharemarkets was reduced over the year and the proceeds were reallocated to more defensive assets such as alternatives, infrastructure, bonds and cash. The allocation to foreign currency was also increased over the period in response to the rising risk of the Australian dollar falling against developed country currencies.
As an example, the following table shows how NGS’s Diversified (MySuper) option performed each month against the median performance of the largest 50 balanced funds in Australia as measured by ratings agency, SuperRatings1. The table also includes another school-based fund - Australian Catholic Super and Retirement Fund (ACSRF).
NGS Super’s Diversified option has been able to keep up as markets have risen and outperform the average balance fund including ACSRF when markets have fallen.
Source: The table above shows the after fees and taxes return for the accumulation account of the NGS Super Diversified (MySuper) option. It also shows the after fees and taxes return for the SuperRatings SR50 Balanced (60-76) Index using median returns and the Australian Catholic Super and Retirement Fund Growth option. SuperRatings does not issue, sell, guarantee or underwrite this product.
What to expect looking forward
The future path of returns is always uncertain and despite the recent rally in share markets across January and February 2019, we believe that the recent market performance has been driven by improving investor sentiment and not improving economic conditions. We therefore continue to maintain a more defensive posture across the entire portfolio to reflect our more cautious outlook over the medium term. As we continue to navigate through the later stage of the business cycle, we are likely to experience both opportunities and threats, so we are constantly reviewing our investment approach to ensure we are prepared for the majority of market events that we may encounter. Over the long term, NGS has structured our investment portfolios to have a high probability of meeting the investment objectives. For further information on the investment objectives, please refer to our Investment Guide.
1SuperRatings SR50 Balanced Index (60-76) median monthly returns after fees and tax to the period ending 31 December 2018. Past performance is not a reliable indicator of future performance.