There's been plenty of speculation on the Superannuation front lately.
In particular, much has been said and written about the proposed $1.6 million 'cap' on Super, introduced by Treasurer Scott Morrison in the new federal budget.
Firstly, it's worth remembering that the policy is yet to pass through parliament.
There's a good chance change will occur, but it's unlikely to be a game-changer for most Australian retirees.
After all, you won't be affected if your super balance is under $1.6 million.
And if it is over that threshold, the tax impact is likely to be small anyway.
Consider this neat example from our own Scott Phillips…
"Let's say you're lucky, savvy and/or a high-earner, who has socked away $2.6 million in Super. The first $1.6 million of that would now go into the 'pension' part of your super and the earnings on that $1.6 million remain tax free. If you earn dividends that yield 5%, there's a cool $80,000 in tax-free earnings."
So far, so good. Scott continues…
"The remaining $1 million would remain in the 'accumulation' account, and attracts a 15% tax on earnings. If you don't realise any capital gains (by selling shares) and earn, say, 5% in dividends, your taxable earnings would be $50,000. Take out $7,500 in tax, and you're left with $42,500 from that part of your Super.
Sure, that's $7,500 more tax than you'd pay under the old regime — but you're still $122,500 to the good, and your effective tax rate is just 5.8%. And even the 15% tax rate is very attractive compared to our personal income tax rates."
As I said, the impact of the proposed changes is nothing to be too concerned about…
And besides, having more than $1.6 million in your super account is a great problem to have!
The Bigger Threat Facing Your Super
While some investors are fretting about the super cap, many are ignoring another widespread problem which could already be impacting their wealth.
It's no secret that Australian investors love their blue chip shares.
They certainly have good reason to…
On top of their rock-solid dividends and perceived level of 'safety', many also offer fat, fully franked dividend yields…
With interest rates pegged to fall to 1% — or perhaps even lower – who wouldn't want to own stocks offering solid dividends?
The problem, however, is it seems investors have become overly reliant on a small handful of shares.
Indeed, you're probably aware that the Australian economy is heavily concentrated to just two sectors…
Let's start with the obvious one — the banks.
Together, the big four account for a whopping 27% of the S&P/ASX 200 (ASX: XJO).
Commonwealth Bank of Australia (ASX: CBA) makes up 9.6% of the index on its own…
Westpac Banking Corp (ASX: WBC) amounts to another 7.2%.
Resources is the other big sector in the market.
Sure, commodity prices may have caused the industry to shrink in value. But BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) still control roughly 5.8% of the main bourse.
Outside of these two sectors, the situation doesn't get much better…
Telstra Corporation Ltd (ASX: TLS) accounts for 5%, and Wesfarmers Ltd(ASX: WES) makes up 3.5%…
You get the picture.
The end result is, the country's top 10 shares account for almost half of the entire ASX 200…
Take a moment to get your head around that fact…
What that means is these businesses also account for a large chunk of many investors' portfolios.
To provide some context, a recent report from the ASX cited data provided bySelfWealth, a start-up social network for investors.
Noting that "nine out of 10 are quite conservative in their investments", the report showed a table with the top 10 stocks held by those SMSFs (self-managed super funds), compared to the ASX 10.
You can see that below:
The results are hardly surprising…
What they show is that nine of the top ten stocks held by SelfWealth portfolios are found at the very top end of the market.
That may seem normal, but it also calls for a word of warning…
Although these are the shares that investors have typically perceived as being 'safe', the last 12 months have proven otherwise.
The banks, for instance, are struggling for growth and could fall hard if the economy does take a turn for the worse…
Meanwhile, Woolworths is losing all-important market share to its rivals. And the miners are completely at the mercy of volatile commodity prices.
Pleasingly, SelfWealth did note that the average number of holdings in a SMSF is 18. But I'd wager that, in many cases, the 'blue chips' mentioned above would have greater weightings in those portfolios.
That also means that many SMSFs may have underperformed the broader market over the last 12 months, and are at risk of doing so for the foreseeable future as well.
Paying tax on earnings above $1.6 million is one thing, but losing capital is something else entirely…
Rather than limiting themselves to a rather shallow pool of investment ideas, some investors are enjoying superior returns by broadening their horizons.
That doesn't necessarily mean they're investing in high-risk shares at the bottom end of the market…
But looking further beyond the ASX 20, there are plenty of fantastic opportunities to consider.
