Which Super Fund should you choose?
It's a good question. I know, because I'm asked regularly.
Including by an old school friend of mine. (No, she's not old. Nor am I, thanks for asking. But we're 'old friends'. Or, at least, that's how I like to frame it!)
Anyway, the point is that she wasn't sure if she was in the best fund, and wanted my thoughts.
Because I'm not allowed to give personal advice – and because I figured that if you're reading this, you're wondering the same thing – I thought I'd give the question, and my answer, a wider general audience.
The first thing, like anything in investing, is that I don't know which fund will be the best one, from here.
The future is unknowable.
What I can do – and we did for our own staff when choosing our default Super fund here at The Motley Fool – is think in terms of probabilities.
And I'm going to start not with the choice of fund, but with some basic investment principles.
See, there are four components to maximising your portfolio's long term value. They are, in rough order:
1. Time: the longer you invest, the more time you give your money to compound
2. Contributions: The more you save, every week, month or year, the more you'll have
3. Fees: Investment returns are uncertain. Fees are concrete
4. Returns: Finding the right, market-beating, investments
Now, it might sound strange for someone who picks stocks for a living, and whose wage is paid by a company that sells access to same, to put 'returns' fourth.
But hey – I'm in favour of honesty. And the company I work for, The Motley Fool, prides itself on telling it straight.
So, for the record, returns are a really important part of investing, and if you can improve them, I reckon you absolutely should!
But, in my humble opinion, the other things are more important (and give those returns the best portfolio on which to do their work!).
See, the range of investment returns available over the long term to you and I (I'm sorry to say that neither of us is Warren Buffett) is decent, but not enormous. Most people will probably be within 2% of the market's average annual return, over decades, if they invest sensibly (that's not a given, unfortunately. Investing sensibly is its own article. Assume things like: 'be diversified, buy quality, don't overpay, don't chase returns. don't speculate, don't use leverage'.)
Now, that 2%, compounded over time, can make an enormous difference. It's why I'm here and why I try to find the best investments I can.
But lined up against the first three factors, it's almost certainly still fourth.
Let me tell you why.
First, if you can earn, say, 9% per annum, your money will double roughly every 8 years.
So, someone investing for 8 years could see their $10,000 double to $20,000. Not bad for just leaving well enough alone.
If you start early enough to extend your investment horizon to 16 years, you'll have $40,000 instead. Now we're talking.
But let's keep going:
24 years? $80,000
32 years? $160,000
40 years? $320,000
Starting at 18 and retiring at 66?
That's 48 years and $640,000!
Yes, that excludes fees and taxes, but I'd rather pay tax on a $640,000 portfolio rather than a $320,000 one.
And – as good as I'd like to think I am – I don't think you should bank on me getting you $640,000 in 16 or 24 years, just by being a master stockpicker!
So, time matters.
Similarly – and I won't repeat the maths – if you started with $20,000, rather than $10,000, you'd end up with $1.28m in our hypothetical example, rather than $640,000.
Can't find $20k upfront? Me either. But regularly adding to your portfolio (remember, the example above assumes one investment, then nothing thereafter) can turbocharge your portfolio size.
And – again – it's easier, more likely and probably more profitable to add money regularly rather than assuming (hoping!) you can make up the difference by being the next investment superstar.
And our third? Fees.
Our investment returns might be unpredictable. But fees are completely and totally knowable and – unless you make different choices – unavoidable.
And… often very large.
Like the interest saved when paying more off a mortgage, you can lock in savings simply by choosing a lower-fee investment strategy.
Now, I'm not against fees, overall. If you provide a service, you should get paid.
I'm not even against performance fees – if someone does a genuinely great job, they should be paid more.
What I am against is high fees, levied irrespective of the performance of the manager.
Comparison site, Canstar, says "Super funds on Canstar's database charge on average between 0.91% and 1.21% of an account balance in fees each year."
Now, that gap alone is 0.3% – which gets added to your investment returns, if you save it.
But what if you could pay a fraction of that.
Australian Super, for example, charges $1 week plus 0.1% of your balance for administration. And then as little as 0.09% of your balance for investment fees.
That's… tiny.
Now, as the ads say, 'compare the pair'. If you could get the same investment performance from two different funds (no guarantee there, but stick with me), but pay less in fees… well, that'd boost your portfolio meaningfully over time.
And if you didn't know whether you could get the same performance from the different funds?
Well you have a choice. You can have:
– Uncertain performance with low fees
Or
– Uncertain performance with high fees
I'm going to suggest it hasn't taken you long to work out which is likely the better bet.
And the fourth? That's the stockpicking bit. But again, if you're putting your money in Super, and you don't know the odds of your fund beating the market over the long term… well, we're back to that 'uncertain performance' bit.
And so?
Well, thanks for reading through the above. See, any time I provide general financial advice – to readers, members or anyone else – I want people not only to hear my answer, but to understand my thinking.
Because, once this article is finished, you'll go on your way. So yes, I want to answer the question, but I want you to have a sense of the 'why', so that next time you reconsider your investment options, you've been equipped with the knowledge of how to do so.
I imagine you've probably already been able to guess my answer on choosing a Super Fund, by the way.
When it came to our default fund here at The Motley Fool, we had to answer this very question.
And essentially, our choice followed the thinking above.
We chose AustralianSuper for our team. We thought it was the best option at the time – it was a very large not-for-profit fund with low fees thanks to its non-profit status and enormous scale.
Is it still the very best option today? I'm not sure. We're probably due to review our own default fund.
But in general, I'd imagine if we do make a change, we'd choose another fund from the same category.
For most people, I'd suggest looking very seriously at a very-low-cost, not-for-profit Superannuation fund. One of the Industry Funds, perhaps. Or another not-for-profit option.
When you can't control the future returns, keeping costs as low as (reasonably) possible is your next best bet.
Fool on!
