With constant talk of doom and gloom and not much emphasis on investor education, financial planners find it difficult to articulate the value of going back into the investment market, writes Michael Dale.
The Australian public is copping the noise again from all sides. ‘What is going on?’ they ask.
More uncertainty, dillydallying politicians, sovereign debt – and what do we see, read and hear?
‘The End Is Near’, ‘World Recession Looms’, ‘Superannuation Underperforms Again’ – many of these backed up with yet more charts and graphs, economic indicators, commodity prices, opinions and the benefit of hindsight.
Does the Australian public need to know, or even want to know the price of copper, or be reminded of how important the Baltic Dry Index (BDI) chart is to some?
After all, many struggle to understand the basic concept of superannuation – and it’s not the public’s fault.
The basic fundamentals of investing and superannuation have been communicated so poorly over the years that the majority of investors are still of the opinion that superannuation is an investment in itself, rather than a trust fund in which investments of choice are held.
The term ‘asset allocation’ would sound like a foreign language to many, and yet it determines the long-term investment return, and more importantly, indicates the most likely outcome in any one year.
Would it help to teach the public to understand this, so that apples can be compared with apples (Australian shares funds with other Australian shares funds) rather than apples with oranges?
For example, a diversified fund with 40 per cent invested in Australian shares with another diversified fund, but with 15 per cent invested in Australian shares?
Would it help the working public (who contribute regularly to a superannuation account) to know that in general, superannuation contributions directed into their particular account buy units, and it is the unit price that determines the dollar value of the account on any single day?
Would it help investors make better investment decisions if they were aware that the name of the superannuation game was to firstly accumulate as many units as possible, and that the greater advantage would be gained if the units could be purchased at a discount?
To illustrate this concept for a client, I have used the example of an actual Australian shares fund.
To simplify the example, we assumed that one dollar buys one unit, and the unit price fluctuated every day in line with the Australian share market, so when the share market went up or down the unit price followed.
For those who directed their superannuation contributions into this Australian shares fund in November 2007 – the highest point of the share market before the Global Financial Crisis (GFC) – the unit price had increased to just above $2.00, and at the bottom of the GFC (March 2009) the unit price had fallen to around 86 cents.
What price would you prefer to buy at, I asked? Would the best price to buy be $2.00 or 86 cents, $1.13 or $1.31?
The answer is obvious, and yet because of the constant noise of doom and gloom, the unit price at 86 cents didn’t seem to be so attractive at the time.
Only with the benefit of hindsight would the majority wish they had another chance to buy more units at the bargain price of 86 cents rather than the high price of $2.00, when everyone was so optimistic.
We discussed all of this with the client, who was also drawing a pension from his superannuation account.
He was also aware that within his portfolio – which was a diversified portfolio, and included the Australian shares fund – that he had five years worth of pension payments held in cash, and several more years of pension payments in other conservative funds which, if required, could be drawn down long before there was a need to sell any Australian shares fund units.
There was no immediate necessity for him to sell any Australian shares fund units at such discounted prices as $1.13 (refer to above) to pay his regular pension payments; in addition to this situation, the quarterly distributions were being reinvested, purchasing more units along the way at today’s cheaper prices.
We discussed all of this, and he was happy that he had more units at the end of the September quarter than the last because of the distribution reinvestment strategy.
He did mention, however, that he was worried about the world economic situation and was seriously thinking of switching everything into cash for the time being, adding that he was aware that 20 years was too long a period to leave the money in cash, so he’d be getting back in to the Australian shares fund when things ‘picked up’.
“So,” I said, “When things ‘pick up’, wouldn’t it be likely that the unit price would have ‘picked up’ also, and you would most likely end up buying the same asset at a price higher than you sold it for?”
He did realise that selling at $1.13 then buying back much the same thing at $1.30 or more in the future was not the most prudent thing to do, particularly when he had a long-term investment strategy and didn’t need to sell units to fund his pension payments for a very long time.
However, not long after this conversation, there was a confirmation letter waiting for me in the mail stating that the client had switched all of the investments in his superannuation (pension account) account into cash while I was away.
Remembering how good a job I’d done in explaining the reasons not to sell, I was stunned, to say the least. So I called to ask him what happened, bearing in mind our deep and meaningful discussion.
The response was equally stunning. He said a family friend, who does not, and has never worked in the financial world in any capacity, but, I quote, “is very well versed in all things investment and economics” told him that we were on the cusp of the worst world depression since 1927, and advised him to move all of his investments into cash.
So he panicked and followed the advice. But he was probably just looking for an excuse to follow his instincts anyway.
What is said about thirsty horses? “You can lead them to water but …”.
Benjamin Graham (renowned investor and teacher of Warren Buffet) always maintained that human behaviour in regards to investing is much more important than how the investments behave.
Sadly, this does seem to ring true.
It would seem that as most experienced financial advisers know, the ‘soft skills’ of detecting and understanding a client’s deep-seated behavioural preferences is the key to understanding why clients sometimes seem to act against their own best interests (at least from a planner’s point of view). Logic, common sense and education don’t always cut the mustard.
Michael Dale is a senior financial adviser at Fiducian Financial Services.
