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Resident Trader
SMSFs - Negative returns not required
Will Kraa, July 21, 2008
Ever since the end of last financial year I have been reading about the negative returns produced by super funds during the period. One publication mentioned one bright spot: Self Managed Super Funds had outperformed the professionally managed funds. It had been calculated that, on average, SMSFs had returns that were not quite as negative as the professional funds!
Unfortunately that is still a negative return and in my opinion that was not a necessary outcome. It may even be worse when you consider that some SMSFs have their money in cash all the time, some mostly in property, and so for the rest with most of their funds invested in equities, the results were possibly just as negative as the professionals.
I have also noticed that lately there has been advertising to the effect that there were a relatively small number of days in the year when most of the gains were made and that, unless you remained fully invested for the whole year, it was quite likely that you might miss out on those days and therefore have only a very poor return. I would certainly agree that moving money in and out of investments without knowing what you are doing is detrimental. But simply hoping that share investments will give good returns if left in the markets for long periods is not necessarily going to work either.
For one thing this idea is usually based on the long term positive outcome of the market index. What is not often taken into account is that badly performing stocks fall out of the index to be replaced by better performing stocks so giving a survivor bias. And the other aspect is that when there are bad periods these can last for a very long time and for someone nearing retirement age there may not be enough time to wait out a prolonged downturn.
I am happy to say that my SMSF did not have a negative return for the 07/08 financial year but in fact was decidedly positive. This is possible even if the share market is having a bad time. When the share market is going down it is often at a time of relatively high interest rates and so just having your funds invested in cash will give quite a respectable return. That is what I am enjoying right now as most of my SMSF is in cash at present.
It is possible to have continual positive returns of course simply by keeping our funds invested in cash all the time but, while that may suit some people who only need a low return, it is hardly the way to get good results. So there are times when it is good to keep funds in cash and other times when the share market is the way to go. The hard thing is to know the difference.
There are a number of excellent investors who are currently either right out of the market or else have very low exposure to it. This has been the case since late last year or early this year. How did they know to do this? If we can learn that then the results for our SMSFs would be much better.
It is in fact not too complicated to find out how this can be done. Have a look at the chart below. It is a Multiple Moving Average weekly chart of the XJO (S&P ASX200). This use of moving averages was made popular by Daryl Guppy and Alan Hull many years ago and can be very useful. They do not tell you when to buy but do give good indication of market direction and status.
As you can see there was a high early 2002 and then the market dived as shown by the short term (blue) MAs diving into the long term ones (red). So that would have been a good time to have your SMSF money in cash. Then in mid to late 2003 you notice the market picked up and the short term set separates and goes above the long term set. Also the long term ones start to separate. The ideal is to have them all lined up in perfect order although dips in the short term ones are a completely normal feature. This would have been a good time to start buying again.
Another interesting thing to observe is that for those who just held on hoping for the best or had their money in the average managed fund it was two years before the market recovered to where it was in 2002. Now that is actually not too bad but there have been times when it has taken a lot longer. There is also the danger that people who have their money in managed investment funds will get to the stage where the pain gets too much and they put their money into cash right at the bottom of the market. This means a very large loss without the subsequent gain. So it pays to get the timing right but looking at the chart shows it is not rocket science.
Now let’s look at the current situation. In July/August last year you can see the short term set diving into the long term ones again in a way they had not done for years. It would certainly have been a time for caution but the short term set did not actually fall below the long term ones before the market recovered again. The interesting thing is that even if you had taken fright then and moved out of the market and into cash you would still have not been too badly off by now and your return for the last financial year would most likely have been positive.
It is when we look at the beginning of this year that the whole lot reversed positions and getting out of the market and into cash would have been an excellent idea. It would have locked in a lot of the earlier gains and from there on the interest on the cash would have added to the returns. Also notice that the recovery earlier this year did not meet the criteria of getting back into the market as pictured in late 2003. So now you can see why most of my SMSF money is in cash and remains that way for the time being.
The chart I am using has the price scale set to logarithmic and this means that moves at higher figures remain in proportion percentage wise. From this it can be seen that the fall so far is of the same scale as the one in 2002/2003. Does that mean we are at the bottom? I don’t have the slightest idea and beware of anyone who tells you otherwise. This is not about getting out at the very top and getting back in at the very bottom. It is about protecting your capital and locking in as much profit as possible. I do not believe in crystal balls (or crystal balls dressed up to look like something more respectable) so I can’t tell you when the top or the bottom occurs.
Next article I will write more about how this applies to the individual stocks held at the time the market turns, why not all my money is in cash at the moment, and what will induce me to buy again.
Note: As you would have noticed from advertisements, the Trading and Investing Expo is held in Brisbane next weekend and I will be speaking there on the Main Stage on Friday 25 July at 2 – 2.30 pm. I will also be conducting a paid seminar on each of the days of the Expo. The details are on their website. I also plan to speak at the one in Sydney later this year.
More articles from this edition of CompareShares:
Share tips: Broker Stock Recommendations 21 July – 6 to BUY, 6 to SELL and 6 to HOLD
Managed funds: How to pick a champion managed fund
Stock picks: Stock of the week – Mermaid Marine Australia
Expert panel: Why do futures prices converge on spot prices during the delivery month?
Superannuation: SMSFs – Negative returns not required
US markets: The worst is yet to come
Economy: Export rise buffets Aussie economy
Takeover: Eagle Boys devours Pizza Haven
Finance: Monitoring of super funds stepped up
US Banking: Treasury chief says US banking is sound
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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