There is Crap Performance and....

QUOTE:
There is Crap Performance and Then There Are Superannuation Funds.

Whilst munching on my toast and vegemite and playing with my tablet (not a euphemism) I saw this neat little paragraph on news.com.au -

Superannuation fund analyst Superratings’ figures show that annual returns for the median “balanced” super fund sector, which accounts for about 80 per cent of Australia’s $1.3 trillion super industry, averaged just 0.92 per cent a year for each of the past five years.

The ordinariness of this performance is so breath taking that there isn’t really much to say directly about it. Its simply crap and it is crap not merely because of the numbers but because of the impact of these numbers. What is occurring here is that one of the major pillars of most peoples retirement is simply not functioning in the way it should.
This will have a vast range of flow on effects well beyond being simply embarrassing for those in charge of managing these funds. If you deprive the baby boomers of their major source of retirement wealth then you are going to have a severe generational problem.

The article continues with a statistic I found interesting -

Mr Bresnahan said the average return on a balanced super fund since compulsory super was introduced in 1992 was 6 per cent.

This figure jarred me for some reason so I went and did a little bit of research. According to the Australian Prudential Regulation Authority (APRA) the real return for the largest 200 surperannuation funds for the past 10 years is 3.9% and it is this 3.9% that is the important figure since it represents the lost decade of investing for baby boomers.

My guess is the 6% figure that is quoted is dragged along by the market boom from about 1993 onwards. The problem with this is that at the time the market was producing an intrinsic return of about 12% excluding dividends.
So even in a boom the industry managed to under perform the market.

Within markets there is a myth that it is important to be in the markets all the time – this way you get all the good days/weeks/months.
Unfortunately this is a myth since it is more important to miss the bad days/weeks/months than it is too catch the good periods.
The reason for this is simple and can be stated thus -

A 10% loss cannot be recovered by a 10% gain, it takes 11.1% gain the move back to breakeven.

Once you understand this you know virtually everything there is to know about money management because within this statement is the basis for all money management.
Once your money is gone, it is gone and you are on a hiding to nothing trying to recover it.

This is the problem with most managed funds they simply do not understand money management in any way, shape or form and this is to extreme detriment of their clients.
Chris T.

 

The problem with most traders is that they don't understand it is a zero sum game therefore if everyone is engaged in it the economy goes to 0.



If people had any real understanding of economics they'd know that a 6% return isn't anything to turn your nose up at. Money doesn't grow on trees - someone busted their ass to get that investor that 6% return.

Too many people vomit stupid lines like, "make your money work for you" when in aggregate the reality is, and always will be, that "you have to work for money"...

 

"The problem with most traders is that they don't understand it is a zero sum game therefore if everyone is engaged in it the economy goes to 0."

Well...yes and no.
There are different opinions on this subject.
Futures/options are considered to be a zero sum game (for every player who wins a contract there is a player who loses a contract).
A stock market, is not a zero-sum game, as long as there is an equal amount of short and long positions (each long is covered by short).


"If people had any real understanding of economics they'd know that a 6% return isn't anything to turn your nose up at.

Money doesn't grow on trees - someone busted their ass to get that investor that 6% return.
Too many people vomit stupid lines like, "make your money work for you" when in aggregate the reality is, and always will be, that "you have to work for money"..."

Cynics are saying that majority of fund managers care more about their quarterly performance and fees, than investor's interest.

There is some conflict of interest which is the main reason why most funds underperform the market in the long run.
This conflict arises from the way fund managers are paid and the way funds are marketed.
It all comes down to short term (quarterly) performance related to benchmark or/and competition between funds with a similar objectives/targets.

Of course, none of fund managers want to underperform, so they are chasing performance taking on bigger risk.
If this happens investors lose money, but managers already earned their bonuses.
Some investors might be happy with 6% return (which is pathetic in my opinion), but if you compare U-bank which is paying 6%+ on your savings, question arises why to invest in managed funds after all.

I tend to agree that money doesn't grow on trees...but some are saying that it all depends on what kind of trees are growing in your backyard.

 

Those differences of opinions are often dependant on whether people are talking about reality or "selling" bullsh!t.

Agreed.

Though if you wanted to take it a step further - you could say it was a negative sum game because in a "real return" sense labour has also been lost in the process of trading which would count as an economic loss, even though it isn't counted as an accounting loss.

Though a counter argument could be made that positive externalities may have arisen out of additional investment that was undertaken as the result of an ability to insure oneself with future/option contracts which wouldn't have happened otherwise. Though of course this implies that people only use futures/options as hedges as opposed to gambling...

Investing in stocks is not a zero sum game, but trading stocks is.

That's what short term thinking gets you.

The biggest reason that fund managers under-perform the market in the long run is that they have expensive management fees eroding returns.

When everyone has management fees to factor in in a zero sum game, it is impossible for the majority of fund managers to beat the market.

That's why over the longer term the market will always outperform ETFs that track the index, because the market has no management fees, but ETFs will always outperform managed funds because they have lower management fees.

And that is why mediocre fund managers will become a threatened species over time, though there will likely always be room for the warren buffetts of the world.

People should always be happy with a growth rate that is equal or above:

productivity growth + population growth + inflation

Inflation (credit growth) has been driving market growth rates for the last couple of decades. The next couple will need to be driven by productivity and population growth to offset what will likely be a period of credit contraction.

Well I ripped up my USD, Yen and Pound trees the other day and planted some Yuan, Rupee and Rupiah trees in their place.

 

- I wouldn't worry about lost labour in trading/investing.
More important thing is that you can lose much more than labour, if you do not know what you are doing.
There is nothing wrong with trading futures or options, but I wouldn't use those two instruments as a hedge. Hedging costs too much. Stop Loss is free.

-The only difference between trading and investing is a time span.
Staying passive in the market for a long time, increases the risk.
This of course doesn't mean that one should become a day trader.

-Not necessarily.
Expensive manager's fees decrease return, but main problem is manager's wrong attitudes and luck of skill (there are some exceptions of course).

-The only problem with this equation is that not many know how high inflation really is.

- Hmmm...
What about, BRL, ZAR...
Problem is that you don't know which tree may give you healthy fruits in the future.

 

But you can be more confident about the trees that are unlikely to bare any fruit for quite a few more seasons...

 

Some will, some don't.