I bought shares today.

For some of you, that might feel notable. For others, hopefully long-term members and readers, that will come as no surprise.

But let me tell you about it.

Actually, I can only tell you some things. If I told you what I bought, I’d probably be fired!

The Motley Fool has a strict trading policy which, among other things, bans me from writing or talking about the companies I’ve purchased (or sold) for two full market days either side of me making the trade.

Why? Because while I doubt very much that me doing so would make any difference to the share prices at all, it might. And the possibility, and perception, of something untoward is enough to mean it’s a no-go.

It’s a really good trading policy. Justice, as they say, not only has to be done, but has to be seen to be done, and our policy covers both.

So, because I like both my job and my paycheque, I’m going to stay on the right side of our policy!

That said, what’s the point of saying ‘I bought shares’, if I can’t tell you which ones I bought.

Well, it’s because at times like these, it can be tempting to be paralysed by geopolitics, inflation, interest rates, headlines, and a falling ASX.

Tempting to wait until the coast is clear: the war in Iran has been resolved, inflation settles, rates start falling again. Until things just… feel better.

Here’s the problem with that approach. There’s two problems, actually:

First, the coast is never truly clear. There’s always something to worry about. Some headline. Some risk. Someone predicting doom and gloom.

Second, the times when the coast feels clear, are the times when share prices tend to be at their highest – because everyone else feels the same.

But remember Warren Buffett’s words: ‘you pay a very high price in the stock market for a cheery consensus’. In other words, when everyone else is feeling good, too, there are rarely bargains to be found.

And also… those ‘what could go wrong’ times tend to precede, well, things going wrong!

Now, I also want to share what wasn’t a motivation for buying shares today.

I’m not saying this is ‘the bottom’.

I’m not saying shares can’t fall from here. Maybe even meaningfully.

I’m not saying this is some amazingly perfect time to buy.

In other words, I’m not timing the market.

I bought shares today because I have cash. And because I believe in the businesses I bought.

I bought shares today because I think that in 5, 10, and 20 years’ time, they will be worth more.

Hopefully much more.

And if I’m right about the businesses, and their future value… why wouldn’t I buy?

Oh sure, in a year’s time, I’ll be able to tell you exactly the dates I should have bought, and the prices I should have paid.

Maybe earlier, or later than today. Maybe at lower prices.

Thing is… that stuff is impossible to know in advance, and there is literally no value in beating yourself up.

The other thing? Well, if I’m right about that future value, the growth that’s coming will hopefully dwarf any nickel-and-diming over trying to guess where the bottom might be.

And in reality, you can only know where the bottom is after you’ve reached it and started climbing, so you’ll miss it anyway!

And then, how do you know the shares won’t go back down? So you wait a little longer…

And then 10%, 15% or 20% goes by. Maybe you buy then. Or maybe you don’t, because you’re cursing yourself for missing ‘the bottom’ and you’re waiting for the next one.

I mean, be my guest, but you might find that you should have just bought at reasonable prices when you had the chance.

Me? I’m buying at what I think are reasonable prices, today. What happens next is outside my control. Maybe they shoot up. Maybe they crash. Maybe nothing.

There’s no way to know, and a lot of time, effort, energy and emotion is wasted in the process of trying to guess.

I don’t know where prices will be tomorrow, next week or next month.

Investors never do.

But time is the friend of a quality business, to paraphrase Warren Buffett, especially one bought at a reasonable price.

So, I bought shares today. I’ll do it again soon.

I’ll buy again not long after that, too.

And I’ll keep doing it, regularly adding to my portfolio with my eyes not on the headlines, but on the horizon.

It’s a time-tested approach, and I suspect it’ll keep working for decades to come.

Fool on!

Let me start with an uncomfortable truth:

If the Australian government announced a meaningful Budget surplus today, plenty of people would be furious.

Not a bit disappointed. Furious.

We’d hear that Canberra was “out of touch”. That it was “ignoring struggling families”. That it was “hoarding money while people are doing it tough”.

And politically, that reaction is exactly why we’re unlikely to see one.

But here’s the thing – and it matters more than the politics:

A Budget surplus right now would probably be one of the most effective forms of cost-of-living relief the government could deliver.

Not because it hands out cash.

But because it helps stop taking it away (via inflation) in the first place.

Before we go further, we need to introduce a concept that doesn’t get nearly enough airtime (but you’ve probably read from me before): structural Budget balance.

In plain English, it’s this: what would the Budget look like if the economy were running at a normal, sustainable pace?

Not booming. Not in recession. Just… steady.

That matters because government revenues and spending naturally move with the economic cycle.

When times are good, tax receipts surge – more people working, higher profits; more income tax and company tax flowing in.

At the same time, welfare spending tends to fall, particularly unemployment benefits.

The Budget can look healthy – even in surplus – without any real policy effort.

Flip that around in a downturn and the opposite happens. Revenues fall, spending rises, and deficits appear.

Again, often automatically.

So when we talk about surpluses and deficits, we need to separate what’s cyclical (driven by the economy) from what’s structural (driven by policy settings).

Because it’s the structural position that really tells us whether fiscal policy is helping or hurting.

And let me be clear: deficits aren’t inherently bad.

In fact, at the right time, they’re exactly what you want.

When the economy is weak – businesses cutting back, unemployment rising, households tightening their belts – government spending can step in to support demand. And automatically!

That’s not theoretical. It’s practical.

More spending keeps people in jobs. It supports incomes. It prevents downturns from becoming something worse.

Think back to the pandemic, or the global financial crisis.

Deficits weren’t a failure of policy.

They were the policy.

As I often say: prepare, don’t predict. And part of that preparation is recognising that sometimes the government needs to support the economy.

But – and this is the bit we tend to forget (some of us just because… our politicians, probably on purpose) – the opposite is also true.

When the economy is running hot, deficits become part of the problem.

Because when the government spends more than it collects, it’s adding demand.

More money chasing the same goods and services.

And when demand runs ahead of supply?

Prices go up.

That’s where we’ve been. It’s where we are now.

And it’s what the RBA confronted on Tuesday.

When inflation rises, the RBA steps in, lifting interest rates to cool things down.

Higher rates reduce borrowing, slow spending, and – eventually – bring inflation back under control.

But here’s the key point: fiscal policy (the Budget) and monetary policy (interest rates) are working against each other.

The government is running stimulatory deficits while the RBA is trying to slow the economy with higher rates.

Which, if you sit with it for more than 30 seconds, is maddening.

One pressing the accelerator.

The other hitting the brakes.

But a Budget surplus would change that dynamic.

Instead of adding demand, the government would be taking more out of the economy than it’s putting in.

That reduces overall spending power.

Less demand means less pressure on prices.

And less pressure on prices means the RBA doesn’t need to push interest rates as high – or keep them there as long.

So while a surplus doesn’t feel like “relief” – no cheques, no rebates, no big announcements – it works in a quieter, more powerful way.

It pushes back against inflation.

And by doing so, lessens the need for higher interest rates.

For mortgage holders, who otherwise bear the full brunt of monetary policy, that’s real relief.

The other thing? Australia hasn’t just been running deficits at the wrong time in the cycle.

We’ve been running structural deficits for a long time.

In other words, even when the economy is doing reasonably well, government spending is still exceeding revenue.

That leaves us with very little room to move when things go wrong.

If you’re already in deficit during the good times, what happens when the bad times arrive?

You go deeper into deficit.

And rack up far more debt.

And as a result, future governments have fewer options. Future budgets have higher interest expenses to pay, reducing the money available for other programs and/or the ability to lower taxes.

A structurally balanced Budget – or better yet, a small structural surplus – gives policymakers flexibility.

It means they can afford to run deficits when they’re needed.

Without putting long-term pressure on the system.

If the logic is this clear (and I think it is!), why aren’t we aiming for structural balance – and running surpluses when the economy is strong?

Because politics isn’t economics.

A surplus requires restraint. It means saying “no” – or at least “not now” – to spending demands.

It requires a population to understand and to vote accordingly, too. (Not for one party or another… just to resist voting for whoever gives out the most handouts, whatever the long term cost!)

Right now, those demands are loud.

Households are under pressure. Prices are high. Mortgage repayments have jumped.

All of that is real.

But here’s the thing: the spending designed to provide relief can end up prolonging the problem.

More spending means more demand… which means more inflation… which probably means higher (or a longer wait for lower) interest rates.

Round and round we go.

We, and our politicians, are the problem.

We want lower prices.

And lower interest rates.

And lower taxes.

And more government support.

And no cuts to services.

…At the same time.

Unfortunately, economics doesn’t work like that. We don’t have a magic pudding.

Good governance means different parts of the cycle require different responses.

Deficits when the economy is weak.

Surpluses when the economy is strong.

And, crucially, a structural position that gives us the flexibility to do both.

Now, none of this is to suggest governments shouldn’t help, when real problems are identified.

Of course they should… especially for those most in need.

But we also need to recognise that not all help comes in the form of a handout or subsidy or discount.

Sometimes, the best help is the kind that reduces inflation.

That brings interest rates down sooner.

That takes pressure off the system as a whole.

Right now, that kind of help would look a lot like a Budget surplus.

Bottom line?

Governments need courage, and we need to vote thoughtfully, telling our pollies what we want.

This is what that looks like:

Running deficits when the economy needs support.

Running surpluses when it doesn’t. (And when it needs cooling!)

And aiming, over time, for a structurally balanced Budget that gives us room to move.

Because the alternative – permanent deficits, short-term fixes, and policy driven by fear of backlash – doesn’t make us richer.

It leaves us more exposed.

And, ultimately, worse off.

Fool on!

Today is Rates Day.

We’ll find out if the RBA is going to raise the official cash rate to fight inflation, or leave it on hold, hoping that the expected spike is temporary, rather than becoming endemic.

Cue the forecasters, making their guesses.

Why?

Well, according to John Kenneth Galbraith – who was right – ‘Pundits forecast not because they know, but because they are asked’.

Now, some people have to make educated guesses – the RBA is one such institution that needs to make rates decisions based on how they see the future turning out.

They’ll be wrong in their specificity, but I suspect – I hope! – they already know that. I think their job is to be directionally right; adding support when the economy needs it and removing excess demand when the economy is running too hot.

I suspect they know that they have no idea exactly what rate will eventually be high enough, any more than we target a specific speed on our speedos when we come into a corner.

We don’t decide, ahead of time, to take an upcoming corner at 52km/h, or 43km/h, or 35km/h. We brake until it feels like we’ve slowed enough to take the corner safely, then accelerate when we feel it’s appropriate. I think that’s the best way to think about interest rates.

The forecasters?

Apparently the bond market reckons there’s a 72% chance of a rate increase today.

Apparently a Finder survey reckons 38% of economists surveyed think rates will rise.

That means there’ll be a lot of people who’ll be wrong at 2.30pm, Sydney time.

And, I hope it’s clear to you that it makes the whole guessing game just a little… silly?

What the RBA should do is a worthy discussion, largely because it lets us work through the inputs into such a decision, and also to understand the potential consequences of the different courses of action.

But what it will do? No-one knows, so the guessing thing is just a parlour game.

Don’t get me wrong – the outcomes are consequential for those paying a mortgage or a business loan… but that doesn’t mean those outcomes are knowable, in advance!

Humans want certainty, though. It’s why tarot readers exist, despite the clear nonsense of being able to ascertain the future (those tarot readers knew I was about to say that!). Ditto those in centuries past who ‘read’ animal entrails and other ‘omens’.

We just really want to know, and would rather suspend disbelief than accept uncertainty.

So, let me puncture that balloon for you. (Sorry, not sorry).

Here’s what we don’t, and can’t, know:

– What the RBA will do at 2.30pm today.

– What they’ll do when they meet again in May.

– Where interest rates will be next year… and in 2030.

– How fast the economy will grow this year.

– When the next recession will arrive (because it will).

– How long it’ll last, and how bad it’ll get before it’s over.

– How quickly AI will disrupt jobs, and the broader economy.

– How significantly it’ll do the same.

– What ‘next big thing’ will fizzle out, instead.

– Where the stock market will be by Christmas.

– What Donald Trump will say next.

– What Donald Trump will do next.

– Whether Donald Trump will see it through, or reverse course.

– What ‘black swans’ are lurking just over the horizon.

– What predictions of doom just won’t come true.

– Which company will be the most valuable in 2030.

– … and 2035. And 2040

– Which startup founder, currently working in her garage, will be a billionaire

– Which company will be the next Kodak. Or Blockbuster.

– Which industry will change the world

– … and who wins from those changes (remember, airline travel boomed, but profits tanked).

Oh, we’d love to know those things. We just can’t. At least not with any certainty.

What, then, should we do?

Three Ps. Two ‘to do’, and one to ‘not do’.

Let’s start with the latter.

Don’t:

Predict.

Predictions invite us to think about specifics. The more specific you try to be, the greater the chance of being ‘precisely… wrong’.

Do:

Prepare.

There are a range of potential outcomes for each of the things I listed above. The solution is not to throw our hands up in the air and abandon ourselves to fate. It is to position ourselves, emotionally and financially, for that range of outcomes, so that we’re not wiped out by a bad roll of the dice and are positioned to gain from a good roll.

Think in Probabilities

I’m an investor. I buy shares in companies (and units in ETFs) that I think are likely to gain in value. I think that’s likely overall – human ingenuity isn’t done yet – so I expect the market to go up… on average and over time. And I think that understanding business and how to think about valuation means that I try to choose those investments that I think have the greatest potential to outperform… on average and over time.

Importantly, I know I’ll be wrong sometimes, because perfection only exists in frauds and Ponzi schemes.

Bottom line: I try to be roughly right, not precisely wrong.

What do I think?

I think the market is likely to be higher, probably meaningfully so, in a decade. How much? No idea. Exactly a decade? No. With a guarantee? Hell no. Just likely, because capitalism, harnessing innovation, tends to create value for society and that value tends to be reflected in share prices.

I think interest rates probably go higher from here, and perhaps for a while, given the RBA’s mandate on inflation, and the fact it seems stuck in the high 3% range and might go higher. When will rates go up? No idea. I could guess, but it’d be just that. If I was right, would I be clever or lucky? Ego says ‘clever’. Rational thought says ‘lucky’. But the RBA might take a different view. Inflation may fall more quickly than I suspect. So making a specific prediction on rates – what level, when, and for how long – is not that different from reading animal entrails.

I think AI is likely to be seriously disruptive. But it might not be. I think there’s a decent risk that the pace of adoption is faster than our ability to create new jobs to replace those that are lost. A certainty? No. The progress of AI could stall. Adoption could stall. The ability for companies to replace workers with AI might be overblown. But I do think individuals across a broad range of industries should prepare for the risk that they lose their jobs. Governments should prepare a range of scenarios, so that they’re ready, whatever the outcome. They – and we – should prepare, not predict.

We’ll have a recession at some point. I just don’t know when. It might be this year, if the oil price stays high, and crimps global economic activity. But the oil price might fall on Friday and be back at the level of three weeks ago by April. The recession might be prompted by some unknown or unexpected X Factor. Trying to predict it is a folly. Preparing for its inevitability is smart.

Speaking of falls, the market will fall at some point. Maybe by a lot. Maybe for a long time. The COVID fall was sharp and deep. But the recovery was swift. The GFC roiled markets for over 18 months. It was slow and grinding and brutal. The next one might look like COVID. Or the GFC. Or something else entirely. But two things:

One: Peter Lynch is credited with the observation that “far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves”.

And two: The investor who adds to their portfolios, buying quality companies during these downturns often (almost always) ends up better off, having taken the opportunity to buy more at cheaper prices.

I think those things will continue to be true.

And I think predictions, borne of ego, will continue to be made – sometimes they’ll even be right. The irony? We can’t know which ones will be right in advance.

Which, as I’ve said, kinda makes the whole thing silly.

Instead? Don’t predict. Prepare. And think in probabilities.

Lastly… stay humble. As humans, our egos write cheques our abilities can’t cash.

Learning that might just be the beginning of economic and investing wisdom.

Fool on!

So… Oil was up 27% yesterday to ~$116 a barrel.

Now down 5% to $86.

The S&P futures were down 1.8% last night, and the US market closed up 0.8% this morning.

The ASX lost 2.9%, but futures suggest we might make most of that back, today.

Thing is? It’s not unusual. Volatility is all-too common.

I don’t know what comes next. No-one does.

Instead? Focus on the long term.

Sources: OilPrice.com, Google, CommSec

Fool on!

Good news: The ASX is up 7.4% over the past 12 months, plus probably somewhere around 4% more for dividends.

So let’s call it a total gain of 11.4%, give or take.

That’s better than the market’s long term average of just over 9% (depending on your source and the start date, but it’s about right over the past 120 years (per Credit Suisse / UBS) and the last 30 (according to Vanguard).

Beauty. Pop the champagne and…

Oh? That’s not the news you’re seeing and hearing today?

You’re seeing something different? A lot of carry-on about a one-day fall?

Yeah, me too.

Which is kinda understandable, but also…  a little too short-term, I reckon.

Yes, big falls make news.

Yes, we feel the pain of losses two- or three times more than the joy we get from similar gains.

Yes, we worry that one bad day might lead to more.

Yes, sometimes that happens, and things get worse.

Yes, sometimes a lot worse… for a long time.

And yet.

And yet, the market is up over 11% over the past 12 months. Plus franking credits.

It is up 25% over the past 5 years, plus something like 20% more in dividends. (That’s 45%, close enough to 9% per annum, as as simple average. Less, compounded, but then you have to compound the dividends… so close enough for our purposes).

But that’s chicken-feed.

The Vanguard data I mentioned before?

9.3% per annum, on average, over the 30 years to 30 June 2025 (the most recent data available).

Or, if you prefer dollars rather than percentages (I do!), enough to have turned $10,000 into $143,000 (before fees and taxes).

You’d reckon that should be the headline story every day, right?

Now, the realists among you will reply with one of two thoughts. Either:

1. It wouldn’t be a headline because it’s taken 30 years to happen; and/or

2. No-one would click on it.

True, and true.

And yet, that is the far, far more useful and powerful stat, rather than worrying about what happened today.

Here’s the other thing: yes, oil was up more than 28% in a single day earlier today. That is absolutely notable.

But here’s the other thing.

The headlines say ‘Oil over $100 per barrel for the first time since…’.

The alternative headline? ‘Oil has cost less than $100 a barrel for every day in between’.

See, framing matters.

No, we’re not being taken for mugs (necessarily) by the headline writers. And they’re not wrong.

The clue is in the first three letters of the word ‘news’.

It’s not their job to provide long-term perspective. I mean, a little wouldn’t hurt, but again, the clue is in the name.

It’s our job, as investors, to bring the common sense. To bring the timeframe that’s all too often missing in the rest of the conversation.

The market probably fell 3% or more in a single day a few dozen times over the 30 years during which that 14-fold return occurred.

Each of those times would have felt scary, unsettling, and like they might be the harbinger of something worse.

Here’s the thing: sometimes they even were.

And yet, that 14-fold return was the long term return.

That is, as I’ve repeatedly written: astounding long term gains accrue despite, not in the absence of these sorts of things.

Not only that, but if you don’t remain invested, and try to guess when the next ups and downs will come, you risk missing out on those astonishing gains!

I can’t make investing anxiety-free. I can’t make the volatility go away.

I can’t tell you whether today’s falls will be a one-off, or the beginning of something worse.

And frankly, I can’t tell you if the future is going to look like the past, either.

But isn’t that the most likely outcome?

Every time the market fell, someone said ‘it’s different this time’. The circumstances might have been, but the outcomes never were.

So sure, maybe ‘it’s different this time’, but I doubt it.

Today’s falls aren’t fun. Losing money isn’t fun.

(There’s a silver lining if you’re still adding to your portfolio – prices are cheaper today! – but that doesn’t help if you’re in retirement and living off the proceeds of your portfolio.)

Tomorrow?

I have no idea what it’ll bring. Maybe things get worse. Maybe they bounce back.

The same for the next week, month and year, for that matter.

But over the long term? Well, unless we’ve hit peak human ingenuity, I suspect the market will be higher in 5 years, much higher in 10 years, and higher again in 20 and 30 years.

And if that’s true, obsessing over daily, weekly, monthly or even yearly falls is understandable… but not very productive.

I can’t make the process easy to endure, unfortunately, but I suspect that endurance will pay off handsomely.

My best advice? Learn from history, then keep your eyes on the horizon.

And I reckon the future is bright.

Fool on!

So… here’s another “I was going to write about something else until…” article.

I was going to write about the hugely disparate recent returns of the different ASX sectors over the past year, but that’ll have to wait until next week.

Because I want to talk about something that’s, frankly, a little drier (way to grab people’s attention, Scott!), but far more consequential, because the impacts may be measured over decades.

And while I’m putting readers off, it’s also something that I’ve written about only reasonably recently (but please read on, anyway!):

Capital gains tax.

Yes, some of you may yawn. But I hope most of you might have just leaned in a little.

Because as investors, regardless of the asset class in which we’re invested, the rate and basis of capital gains tax has a significant impact on our total returns.

So we really should be paying attention.

Especially when our politicians (and various lobbyists) are arguing about potential changes.

Now, last time I wrote about CGT, it was to disabuse my readers of the notion that changes to the way capital gains are taxed would have any significant long-term impact on house prices.

Frankly, I’ve not seen a serious piece of economic research, from anywhere across the ideological spectrum, that suggests CGT changes would have any sizeable ongoing impact on housing affordability – a view that completely accords with my own.

You can read that article here.

So why am I returning to the well? Not to restate that view on house prices, but because it seems that there is a groundswell to change CGT anyway.

And, if it’s going to change, my fear is that focus-group-focused politicians will be inclined to make a change that sounds good, and maybe one that lends itself to a good headline, rather than one that makes any sense.

(Yes, that’s not a stretch, based on recent policy announcements from both sides of politics! But that’s why I thought it was important to step once more into the breach.)

That last article has a little of the history of CGT, including the past approach of ‘indexation’ which you can read at will, if you like.

But let’s start from first principles.

If you buy an asset today, and hold it for more than a year, there’s a very good chance that part of the increase in the price of that asset is the result of inflation.

Let’s assume you invest in a mint condition old-school Coca-Cola yo-yo (kids, ask your parents) for $50 today.

In a year’s time, you sell it for $55. But during that time, inflation was 4%.

Now, inflation doesn’t impact all prices by exactly the same rate, but it’s fair to assume that, on average, some of the price increase from $50 to $55 is because of inflation.

If the government was to tax you on your full $5 gain, they’d essentially be taxing inflation.

That’d be… bad.

The solution? A fair policy would note that inflation would have taken the price from $50 to $52, so the true investment gain is just the difference between $52 and $55, or $3.

And feel free to take a different view, but I’m yet to have anyone disagree with that basic logic.

So, if you were going to design a system to tax capital gains, you’d allow a taxpayer to ‘index the cost base’ (that is, increase it by inflation) before calculating the true (‘real’ in the economic jargon) gain for the purposes of taxation.

Yes, you’ll need the inflation numbers, but the Australian Bureau of Statistics is very good at providing those, and the ATO could just give us a standard table to use. Throw in computerisation, and it’s a doddle that the average primary school kid could do standing on their heads.

Spoiler alert: if that approach feels familiar, it should: ‘indexation’ is the approach we used to use between 1985 when CGT was introduced, and 1999, when a new method replaced it.

And the new method is what’s now being discussed.

It introduced an arbitrary 50% discount to all capital gains, and did away with the indexation method.

Why 50%?

Politics. (The argument was that it was ‘simpler’, and it is, a very little bit, but it was unnecessary in 1999 and even less so now, in the age of ubiquitous computerisation.)

And the current debate? Well, some are saying the discount should be cut to 33%. Or 25%.

Why? Again, politics.

I’ve seen no cogent argument as to why a 33% or 25% discount is a more appropriate and justified basis for taxing capital gains.

You’ll get the usual motherhood ‘It makes property investing less attractive for investors’ and the like, but given the research I mentioned above, that’s a very, very thin argument, even if the good intentions – giving more young people a fighting chance to buy their first home – is admirable, and is a vital thing for us to tackle.

See, even if they’re directionally right (though the impact would likely be tiny), the proposed changes are entirely arbitrary. At best, ‘less incentive is better’. At worst ‘the punters will think we’re doing something about housing’.

And there will still be absolutely no policy-based justification for the approach.

The only intellectually honest way to tax capital gains is by recognising that inflation shouldn’t be taxed.

(By the way, the discount, whether 50%, 33% or 25%, could mean you end up being taxed on inflation – or make a windfall gain – depending on the relative levels of the investment gain and the inflation rate. An investor in any asset shouldn’t have to take a punt on the future inflation level when deciding what to invest in.)

I understand the interest in potentially changing CGT, based on concerns about housing affordability. It’s a poor tool for that job, given the history and research, but for some, it’s better than nothing.

That aside – or maybe because of that – it’s important that any change to CGT is not just a knee-jerk reaction to perceived issues, and that any new CGT structure is based on sound economic and tax policy thinking.

My fear is that, if we don’t speak up, those in power will go for a ‘simple-but-wrong’ answer instead. And that’s why I went back to the well on CGT, today.

Don’t get sucked into the political games, particularly that CGT will be a meaningful contributor to housing affordability.

It should be changed, but to a more justified policy-based regime – not as a pretend fix to a very real problem.

So, to be 100% clear:

1. Capital Gains Tax shouldn’t tax inflation

2. An arbitrary discount – 50%, 33% or 25% – is a poor way to achieve that

3. ‘Indexation’ – increasing the cost base by inflation, before calculating the ‘real’ gain, is the best approach

Remember, if we don’t speak up, the louder voices will have their way, instead. And that’s why it was important to write about this again, today.

Have a great weekend!

Fool on!

So, I was tempted to start this article with ‘Dear Angus’; the ‘Angus’ in question being Angus Taylor, the new leader of the federal parliamentary Liberal party.

But, well, in our hyperpartisan world, I would have been accused of either sucking up to, or unreasonably criticising, one party or the other.

So… I’m going to say exactly what I would have said, anyway… just without addressing it only to the new leader!

Because the thing is, the economic challenges Australia faces aren’t partisan political ones.

Unfortunately, our politicians are. And that’s kinda where the problems start.

To be a little fair, all politics tends to be ideological or philosophical to a greater or lesser extent. That’s natural.

People tend to coalesce around their common views of the world, their common interests and their common ideas of how to improve things.

That’s how parties end up with broadly agreed worldviews on what’s important and what policy options should be considered.

But that breaks down in two important ways.

First, ideology tends to trump (no pun intended, but it’s also not inaccurate) pragmatism and evidence. If you choose to see the world a certain way, and you want to see the potential solutions through that prism, you’ll be wilfully, or sometimes subconsciously, blinding yourself to other options which may be superior.

Secondly, and maybe more depressingly, policy is too often the servant of politics. That is, our current and would-be elected representatives are often only too happy to sell us poor policy because it’s electorally popular, or because it’s seen – however incorrectly – to be addressing a very real issue.

Take both major parties’ claimed ‘solutions’ for housing affordability:

The Labor party juiced house prices at the bottom and middle of the market by uncapping the First Home Buyers Deposit Guarantee. Dressed up as help for ‘affordability’, the turbocharged deposit guarantee just injected more demand into the market and pushed prices up, as demonstrated by research from property research firm, Cotality.

On the other side of the chamber, the Liberal and National Coalition wanted to improve ‘affordability’ by encouraging people to access their Super to buy a home. Which… would also simply have pushed prices up.

Both were dressed up as ‘affordability’ measures that did / would have simply pushed prices up, making housing no more affordable… but providing a nice political ‘solution’ to sell to the electorate.

And then you have populist politicians on the left and right arguing for seemingly attractive policies that are economically simplistic, wrong and play on the emotions (and too often, prejudice) of the electorate.

(By the way, can I gently say that if you think their side is populist but yours isn’t, you might need to open the other eye!)

But that’s enough about the politics. True, it’s a pretty big mountain to climb before policy can be implemented because it’s in the national interest, but let’s for a second imagine we can scale that particular obstacle.

The reason I was going to start with ‘Dear Angus’ is that we have a new leader, unburdened with policy legacy, and who is talking about some of the economic challenges that face us.

Yes, it’s easy for anyone to do that from opposition. And yes, there have only been motherhood statements so far. I’m not here to praise or condemn Angus Taylor, but rather to use the possibility of some new policy options as an opportunity to hope for better economic conversations in our politics.

Do you remember how little discussion there was from the majors on tax, or the economy, at the last election. Oh lots on the ‘cost of living’, but that was populism, not economics.

Why populism? Not because inflation isn’t real – it absolutely is. But because the ‘solutions’ were like proverbial band-aids. Useful, to deal with the injury, but absolutely no help to address the (ongoing) cause.

Now, I’m not going to claim to have all of the answers. But if the new Liberal leader does come up with differentiated policy solutions (not just the different slogans from the last election), then we’ll be able to have a real policy debate. And the government will also have to decide whether it wants to make policy changes, too.

Call me Pollyanna, but this might actually mean economic policy is actually up for discussion and improvement, whatever your politics.

Too much to hope for? Maybe. But below are some areas that I hope either or both parties bring to the table, either to gain an advantage, or kicking and screaming – it doesn’t matter, as long as they’re live discussions.

First is the very structure of government spending. The current bipartisan view seems to be that running endless deficits is fine.

Yes, we have an inflation problem and a federal parliament that has been happy to run endless deficits (and to project the same for the future) – adding to demand while the Reserve Bank has been trying to reduce it.

The Federal Budget, when constructed properly, has ‘automatic stabilisers’ – adding to demand when it’s needed (think: welfare spending that rises when the economy contracts), and reducing demand when it’s not (think: tax revenues that rise when company profits boom and unemployment falls).

When government adds to demand, in that scenario, it (appropriately) runs a deficit. When it’s subtracting from demand, it will record a surplus. And, over time, the two should roughly cancel each other out.

It’s not rocket science. It’s not even controversial. But it’s easier for governments to run endless deficits so they can keep spending on stuff we might vote for, so they make no serious effort to fix the problem.

Worse, we’ve become so used to it, and to having our votes bought, we’ve stopped demanding it.

We need the Budget to be in ‘structural balance’ so those automatic stabilisers can work the way they were intended.

(And it also means our national finances will be in ruddy good health the next time we’re confronted by a recession, pandemic or other unexpected external shock.)

Next, the same approach must be taken when it comes to State and Territory finances. As the International Monetary Fund said the other day (quoted in an AFR article):

“Should state spending continue to accelerate, risks include inefficiency due to rising construction costs and additional credit rating downgrades leading to higher interest expenses.

“As the Commonwealth is viewed as a de facto guarantor of state debt by some credit rating agencies, higher sub-national debt could eventually impact Commonwealth borrowing costs.”

Not only that, of course, but the ‘automatic stabilisers’ work – or don’t – at a State, as well as Federal, level. We need economic policy working together… not at loggerheads.

Then, both related to the Budget balance and for its impact on economic growth and prosperity, we have the mix of taxation and government spending.

Addressing the Budget means addressing both sides of the ledger, but it’s also important to make sure we have spending and tax settings right because of their impact on the economy.

How? Here are some starters for ten:

– We should be discussing increasing the GST and reducing income taxes (with full offsets for welfare recipients and low income earners).

– We should be removing dozens of tax deductions that are distortionary – and too often, politically motivated – and make accountants rich (sorry, accountants), using the proceeds to lower marginal tax rates further.

– We should be supporting those with disability, but junking the NDIS structure. A three-sided market where the payer, service provider and recipient are each different people is ripe for overcharging at least, and outright fraud at worst.

– We should pursue non-ideological efforts to remove/reduce wasteful government spending and duplication.

– We should take the same approach to ‘red tape’ – too often a political pejorative – to actively reduce the government burden on business where possible, to help boost productivity.

– We should increase resource rents and royalties and use the proceeds to fund a Sovereign Wealth Fund – turning one form of eternal assets (minerals and hydrocarbons) into another (financial) for the benefit of all current and future Australians.

– We should quickly and significantly reduce the rate of population growth, through non-discriminatory means, to rapidly improve housing affordability.

– We should absolutely resist the self-inflicted wound of imposing tariffs or subsidies.

In sum? Populism – the amplification of grievance and the proposal of simple-but-wrong ‘solutions’ – would be a terrible waste of the opportunity to make change. But real, grounded, pragmatic, evidence-based policies could meaningfully improve the standard of living of the average Australian over time, and avoid making things worse for our kids.

It’s not all I’d do, necessarily. But I reckon this is most of the problem and opportunity. And a bloody good start.

For the record, too, I’m not a ‘big government’ or ‘small government’ guy. To my mind, government should simply do the things that the market can’t or won’t do (well). The resultant size should be an output from the conversation, not the input. Anything else is, in my view, just ideology.

A reminder, too: this isn’t about policies that only the new Liberal leadership should adopt. I’d be very happy for either or both sides of politics to jump on the bandwagon; frankly, it’d be better if it was bipartisan, because that would stop the sniping and the fear campaigns that inevitably follow new policy announcements.

The risk, of course, is that they both just play popular/populist politics, instead. It’s seductive, but terrible for the country.

How about it Angus? Anthony? Jim? Jane?

Do it for the country?

Fool on!

Well, as of last Friday, we’re halfway through what is colloquially known as ‘earnings season’.

You probably know this, but companies that are listed on the ASX are required to lodge their accounts within two months of the end of their half- and full-year accounting periods.

What you may not know is that companies aren’t obliged to use the tax- or calendar years – they can pick whatever date they like. They just have to lodge their accounts within two months of that date.

In the event, the vast majority of companies use June 30 and December 31. Most run traditional financial years – July 1 to June 30. Some use calendar years: January 1 to December 31. Either way, their half-year or full-year results are due by the end of February.

And given it usually takes them a month or so to put all of the data (and annoyingly self-promotional ‘investor presentations’) together, we don’t tend to see them start publishing until this month.

And so, February (and August) become ‘earnings season’ – when almost all ASX companies give us that biannual look under the proverbial bonnet (no, not ‘hood’, thank you… and get off my lawn!)

And as of Friday, we’re halfway through the month. So, what have we learned?

Firstly, investors really, really hate surprises. Like, really.

There have been quite a few large falls of 20% or more when companies released results that weren’t in accordance with investor expectations.

Sometimes, that’s justified. Other times? Well, short-termism can be the enemy of long-term success. If your investment thesis relies on one six month period being ‘just so’, then you’re playing with fire.

On the other hand, if you are looking at a company’s long-term growth prospects, half a lap around the sun is far less consequential.

We’re definitely in the latter camp at The Motley Fool. Half-year results can absolutely be milestones, so we don’t disregard them, but our focus is clearly on the question: “What does this result say about the 5 and 10 year prospects”.

Sometimes, it says a lot. Good or bad. Sequential profit increases from quality companies are lovely. Unexpected losses can be a warning. But sometimes it’s the opposite! That’s why you have to look at the detail for yourself, rather than using share price movements to try to guess.

The best bit? If other investors overreact to temporary problems, but we think the long-term story is intact, we sometimes get the chance to take advantage of their pessimism and buy at cheap prices!

Second, growth comes from a multitude of places, and knowing which is which is vital when assessing a company’s long term prospects.

Compare Commonwealth Bank of Australia (ASX: CBA) and ANZ Group Holdings Ltd (ASX: ANZ), for example.

CommBank managed to grow profits by 6% by growing its lending and deposit bases, even as margins shrank a little.

ANZ’s year-on-year profit growth was the same, but it achieved that result largely by cutting costs.

Which result is better?

In the short term, money spends the same, no matter its source.

In the longer term, you ‘can’t cut your way to greatness’ as the old saw holds.

On this result alone, Commonwealth Bank shareholders should be happier than ANZ’s, because the former is on a significantly stronger growth path, which may bode well for the future.

That’s not to say ANZ can’t find growth from here. Or that the cost-cutting wasn’t justified. Just that compound returns tend to be better when a business can deliver on something I tend to look for: ‘being more relevant, to more customers, more often’.

Lastly, a perennial one: earnings season really should be called ‘expectations season’.

Because share prices don’t react to the actual results, but rather how those results compare to the market’s ‘expectations’.

Take a couple of energy companies: AGL Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG). Both companies’ profits fell, compared to last year. And the share prices… rose.

Now a couple of retailers, Temple & Webster Ltd (ASX: TPW) and Nick Scali Ltd (ASX: NCK). Both grew revenue strongly. Temple & Webster’s profit fell, while Nick Scali’s rose. And both companies’ share prices… crashed.

Why?

In all four cases because the market expected something different to what the companies delivered.

By the way, don’t be sucked into thinking about companies on the basis of their share prices. Sometimes, the movement in the share price tracks the business performance. But less often, in the short term, than you might think.

Too often, you hear ‘Oh, XYZ is a great stock’. What those people mean is ‘the share price has been going up lately’.

Or, ‘ABC is a terrible stock’ when they mean the price has been falling.

It’s true that the investor returns have been good, and bad, respectively, in each case.

But they’re talking about a really abstract issue, here, often without knowing it.

They’re not really talking about the company at all – just its share price…

They’re comparing two arbitrary points in time…

And they’re comparing an average market expectation at those points.

Here’s why. Consider a company whose shares fell from $100 per share to $10. That’s unquestionably bad for those who paid $100 a share to buy it.

It’s had a bad year. But does that make it a ‘bad stock’? Only over that timeframe.

Now let’s say the shares go from $10 back to $100 and then to $200.

Is it now a ‘good stock’? Most would say yes.

But in both cases, all we’re really saying is that the crowd loved, then hated, then loved the company again.

Maybe justifiably, based on the company’s performance.

Or maybe not.

And here’s the thing: it’s all in the past anyway.

The only thing that matters is the future. Who cares if it is considered a ‘good stock’ or a ‘bad stock’ based on past activity (and past investor sentiment).

Investors hate tech companies at the moment. They loved them a year ago.

We’ve seen this movie before. The dot.com boom and crash, anyone? Or less remarked upon, the post-COVID tech boom and subsequent fall.

Banks are having a moment in the sun, after going nowhere for a few years, post-COVID.

Looking backward would have been somewhere between useless and expensive, if you’d used only past history to work out when to buy and sell.

So, as you look at the results of the past two weeks, and prepare for the next fortnight, here’s a quick list to keep in mind:

Ignore:

– ‘Great stocks’ and ‘bad stocks’

– Sentiment-driven share price moves

– Past share price performance

– Promotional company announcements that seek to selectively direct your attention

Focus on:

– The underlying earnings power of a business

– What the result tells you, if anything, about the long-term future

– The candour of management

– Whether today’s price (not last year’s price change) is attractive, based on the above

No, it’s not always easy to ignore the people yelling ‘the sky is falling’, or a soaring share price.

But that’s exactly what we have to do.

Your returns don’t come from ‘what just happened’, but from ‘what happens next’.

Invest accordingly.

Fool on!

Life, as they say, is what happens when you’re making other plans.

Which is why, a couple of weeks ago, I wrote about choosing the right Super fund, and told you I’d be back soon with the second part of that story. But…

‘Soon’, as it turns out, isn’t as soon as I wanted it to be, but at least we finally made it back.

Last time, I ran through both ‘pooled’ Super funds (Retail and Industry Funds) and SMSFs, with some thoughts as to when each might be worth considering, based on the financial circumstances and interests of the member.

And, as I said last time, choosing the Super fund is like choosing a house to buy. The next step is choosing the furniture.

Where am I going with that clumsy metaphor? Well, the Fund gives you the structure. The next step is to choose how the money inside the fund will be invested.

Choice can, of course, be wonderful, but it can also be incredibly difficult and make life much more complex.

There are scores of choices right across the Superannuation spectrum, but we can break them down to only a few major categories, and that’s what I’m going to help you work through today.

Now, when you join a Superannuation fund, if you don’t make a choice, you’ll be put into the fund’s MySuper option. That’s generally what they call a ‘balanced’ option which has a mix of Australian shares, international shares, property, bonds, cash – pretty much the plain vanilla, don’t-scare-the-horses, option.

No surprises, lower volatility, and a pretty good, if not great, potential return.

Then there are other pre-mixed options, the most common of which will be ‘conservative’ or something similar, and ‘growth’ or ‘aggressive’.

The idea is that a so-called conservative investment option won’t be anywhere near as volatile, and will probably be in positive territory most of the time, but also probably won’t give you the best long-term return.

High growth or aggressive, on the other hand, will likely be far more volatile, at least compared to the conservative option. The thing is, by being concentrated in growth assets like Australian and international shares, for example, you also should expect a much better return over the long term.

Essentially, the options that are provided give you a trade-off – even if you don’t realise it – between the size of your long-term return and the degree to which any individual month or year varies significantly from the average; and even how frequently your overall Superannuation balance goes down.

So there are two parts to choosing the right option within Superannuation: the first is the sort of return you’re aiming for, and the second is your ability to sleep at night.

In fact, they probably should be considered the other way around.

The thing about investing is that unless you can stay the course, you’re probably not going to get the best returns. That means some people should probably make a more conservative choice so they can sleep at night… and not sell in a panic next time the market swoons. The trade off? You probably end up with lower overall returns.

Conversely, the best long-term returns are probably going to come from taking a little more perceived risk: embracing a little more volatility. But doing so by investing in assets – usually shares – that are going to give you a superior long-term performance.

At this point, I want to remind you about life expectancy.

No, I’m not going to get macabre, in fact, exactly the opposite.

Too many people, when they think about Superannuation, think about retirement day. Maybe you’re 25 or 40 or 55, and you’re counting the years between now and when you stop working, and you think about your Superannuation balance in the same context: “I will get my Super when I retire” is often the perspective most people bring to their investing.

The thing is, if you’re 40 today, there’s every chance, according to the actuaries, that you’ll be retired for longer than you have left to work. In other words, retirement is not the end of your Superannuation journey.

In fact, it may not even be halfway between now and when you finally shuffle off this mortal coil, and your Superannuation has to last you for that whole time.

Don’t get me wrong, this is not a suggestion that you don’t spend money in retirement.

You absolutely should. You’ve worked hard and saved hard for what you want to get out of that retirement.

Instead, my reminder is that if you are to maintain your Super for years after you retire, you need to think about that as a growth period as well as a drawdown period. You want compounding to be working for you so you can generate the income you need, to let you live a comfortable retirement life.

Now there’s no single answer and no silver bullet. Everybody’s temperament, risk tolerance, circumstances, Superannuation balance, and life expectancy will be different and largely unknowable, at least in advance.

But the framework I’m suggesting hopefully puts you on the right path: that is, think about how many years you have between now and when you’re likely to take your last breath. Again, not to be macabre, but exactly the opposite: to maximise your ability to enjoy your life to its fullest between now and then.

Let’s go back to temperament first. If you are someone who simply can’t stomach volatility, you probably shouldn’t be investing your Superannuation in growth options. Now let’s be clear, you’re giving up some potential return in doing so, but at least you’re not going to get scared and sell everything at exactly the wrong time: when the market has an occasional unfortunate, but real, dip from time to time.

I’m not doing you any favours by trying to encourage you to get a better return if you can’t actually follow through.

But let’s say you can. Let’s say you can maybe even comfortably put up with it. What should you do?

Well, I’m not allowed to give you personal advice, but in general, if you’ve got 40, 50, 60 years left of life – not of work, of life – then I reckon most people should be thinking about investing in growth options within their Superannuation to maximise the returns over that long term.

Yes, the returns in any given year might be more volatile, but overall, I fully expect – there are no guarantees, but I fully expect – you will do well… and much better if you take a little bit more risk and invest in assets whose value grows over time.

Here’s how to think about it: few people are going to retire, access their Super, sell everything, and go on the pension on the same day. If you are, then knowing how much you’ve got at 65 or 67 is really important.

But if you’re going to slowly draw down your Super over your retirement years – and remember that could be 20, 30, or 40 years–then your investment horizon is far, far longer than you may realise or have really internalised.

If you’re 40 and likely to live to 100, you have 60 years of investing ahead of you – probably three times as much to come as you have had so far.

In that case, isn’t your investment horizon much longer than otherwise might seem at first blush?

Now, in retirement you might still prioritise having some income from that portfolio or changing at some point how much of your money is invested in growth assets.

But given that timeframe, I hope it might also make you rethink how you’re structuring your investment choices, over both your working life and your retirement years.

So, depending on your temperament, growth probably should be the default for almost everybody, unless you need to draw down the capital – not just income, but the capital itself – from your Super upon retirement.

I should say here, by the way, that the usual disclaimer applies, both ethically and legally: past performance is no guarantee, and I can’t promise what the future will look like either. All I can tell you is that my Super remains in growth assets, and before my wife converted her Superannuation to our SMSF, her Industry Superannuation was invested under a growth strategy.

Are we good so far? Excellent. Stick with me… we’re almost there.

Now that I have you thinking about growth, I’m going to add one more option, and then we’ll wrap this up.

You don’t have to accept any or all of the pre-mixed options inside Superannuation.

The problem with the funds management industry in general, including Superannuation, is that there are plenty of snouts in this particular trough. It’s not even necessarily people doing the wrong thing, they just are all extracting their fees for the work that they’re doing, and you’re paying the bill.

So yes, if you don’t want to choose, or don’t know how to choose, how your Super is invested, these pre-mixed options are good choices. However, you can generally get a very good, and very likely better, outcome by making a few simple choices yourself.

Rather than accepting a relatively high-fee growth option, for example, most Superannuation providers will allow you to select specific Exchange Traded Funds (ETFs). So, for example, rather than choosing the ‘growth’ option inside your Superannuation, you could choose to invest your Super in an Australian shares ETF, a US shares ETF, and/or a global shares ETF.

Again, you have to decide what’s right for you, but you’ll find the fees are almost certainly far lower in that circumstance than accepting one of the pre-mixed options – because those pre-mixed choices are usually invested with other fund managers who take their clip of the ticket. By self-selecting low-fee ETFs, you still pay an investment fee, but it’s incredibly tiny. You’re not paying for a fund manager to make those decisions on your behalf.

Now, if a fund manager can beat the market, they might be worth the fees you will pay. But in a pre-mixed option, are you likely to beat the market? If not – or if you don’t know – you may find that self-selecting some very low-fee ETFs is a much better way to go.

So let’s bring this to a close.

If you want to have an SMSF and choose your own stocks or indeed assets outside the share market, go for it. If you’re built for that and think you can do it successfully, an SMSF can be a great tool.

If not, here’s what I reckon probably presents the best long-term return for people who have the ability to stay the course:

If I wasn’t going to pick stocks, I would have my Superannuation in a large, low-cost, not-for-profit Superannuation fund, either an Industry fund or another not-for-profit Super fund.

And if my money was in that not-for-profit fund and I wanted a pre-mixed option, I would choose growth.

If I was comfortable to not go with a pre-mixed option – because I wanted to maximise my chance of the best return while keeping my fees low – I would direct my Super fund to invest my Super in a few low-cost, broad-based index ETFs: Australian, US and Global shares.

And that’s as simple and as hard as it needs to be.

Keep your fees low, choose short-term volatility as the price of (likely) higher long-term returns, add regularly, and invest right through your working life and keep investing through your retirement.

For many people, perhaps most, that probably means choosing plain vanilla index ETFs inside not-for-profit Superannuation funds.

Phew, this was long. So was the last one. And believe it or not, both were as simple and as short as I could make them without only giving you part of the story.

Remember, it’s not a prescription. I hope what I’ve given you instead is a way to think about making sure your Super is in the best fund and invested in the options that make most sense to you based on your circumstances, including your tolerance and comfort with volatility. And I hope I’ve encouraged you to be a lifetime investor, not just a working-life one.

After all, that’s what good investing is.

Fool on!

It’s a question I get asked regularly – most recently just the other day, prompting this article:

‘Do I have the best Super fund?’.

My first answer is always ‘I can’t give personal advice’… because, well, I can’t.

The regulator, ASIC, has very specific rules about the difference between ‘general’ and ‘personal’ advice. I can tell you what I think about an issue or investment, but I can’t tell you if it’s right for you, personally.

The difference? Personal advice would take things like your goals, objectives and risk tolerance into account. And lots of other things.

And it needs to be created using specific processes and delivered with some very specific paperwork!

So I can tell you what I think of different Super funds, but not whether you should (or shouldn’t) become a member of a specific fund – you have to take my ‘general’ advice, then consider if it meets your needs (or speak to a financial advisor directly, if you need extra support).

(And none of this is tax advice, either!)

I’ve said before that Super is stupidly complex. Way, way too complex.

There are rules for different types of contributions for different members based on different life circumstances.

There are rules about how much can be contributed, in what categories, and what tax does and doesn’t apply.

There are rules about how much money can be held in what specific accounts, and how each of those accounts are taxed.

There are rules about when the money can be accessed, and how much can be accessed (and in some cases, must be withdrawn).

And, believe it or not, even those are generalisations, and only just touch the surface.

I’d radically change (and simplify) the rules. But that’s a whole other argument… and article.

I’m going to focus, here, on how to think about approaching fund selection in general – I just won’t be able to address every possible permutation!

First, there are two broad fund types: so-called APRA-regulated funds (big, pooled funds, run by fund managers) and Self-Managed Super Funds (SMSFs).

And the first group can be split into two broad categories: Retail Funds and Industry / Not-For-Profit Funds.

Let’s talk, first, about why and when an SMSF can be attractive for most people.

SMSFs are wonderful for people who want to take control of their investments, who want to invest in things not easily accessed using traditional Super funds, and/or who have a fund balance (which can be pooled with other family members or close associates) which is large enough to keep costs (as a % of the fund balance) low.

And while it might be implied, the other consideration is whether you are likely to actually be good at picking investments! I think it’s something that most people can develop, in time, but just keep that in mind.

Generally, Retail and Industry funds have low fixed fees, and low fees as a percentage of the fund balance, but the latter can get pretty large if your fund balance does. In contrast, SMSFs usually have high fixed fees, but those fees tend not to change as your balance grows.

So you’ll find that variable fees suit smaller balances but fixed fees favour larger balances.

Where’s the cutoff? In short, it depends.

I have an SMSF. It charges close to $2,000 per year, plus I have to pay some regulatory fees.

In contrast, AustralianSuper (an industry fund) charges $1 per week, plus 0.1% of your balance, capped at $350 per year, plus investment fees between 0.05% and 0.52% of your balance (The ‘Member Direct’ option has a different fee scale, up to $180 per annum.)

Now, if I had $50,000 in my Super account, the $2,000 SMSF fee would be 4% of the balance.

By contrast, using AustralianSuper’s own example of their ‘Balanced’ option, the fees would total $387, or 0.77%.

If I had $5 million (trust me, I wish I did, but I don’t!) in my Super, the $2,000 fee would be 0.04% of the balance, and AustralianSuper would be an admin fee of $402 and investment fee of 0.57%: that adds up to a blended fee of 0.58%, which would amount to $29,000 per year.

Now, these are rough calculations, using extreme scenarios, it shows you the different impacts of flat fees and percentage fees.

It matters a lot, too, which investment option you choose within AustralianSuper… did I mention it’s complex?

The last wrinkle? The person running the SMSF has a lot of legal responsibility and paperwork to account for. It’s not hugely painful, but it is a bit of a hassle. You need to be up for the responsibility and the effort.

For some people it’s no big deal. For others it’ll be a deal-breaker.

Know thyself, dear reader: If the cost, time, interest and flexibility appeal to you, you might want to look into an SMSF. If not, read on for my thoughts about the traditional Super Funds.

Let’s return, now, to the two types of these Super funds: Retail vs. Industry/Not-For-Profit funds.

The difference, at least structurally, comes down to ownership and profit motive.

A Retail fund is owned by a for-profit business that wants to earn a buck by providing you a service for a given fee and keeping a small amount of that for itself, after costs.

An Industry Fund (so-called, because they were created by employer and/or union groups in each industry, like the Health, Building or Hospitality industries) is owned by members. Other non-Industry NFP funds that have different origins include Australian Retirement Trust and Vanguard.

(While I called them ‘Not-For-Profit’ funds, the industry calls them ‘profit-for-members’, but in practice it’s the same thing.)

So which should a member choose? Well, the numbers are pretty clear. Industry Funds, individually and as a group, almost always beat Retail Funds.

Why?

Well, investors as a group earn the market average return, by definition. And Super Fund members as a group will likely do more or less the same. So then, in aggregate, what’s likely to differentiate Retail and Industry Funds?

Costs.

And costs tend to be lower at NFP funds, accounting for a very large chunk of the difference in performance.

In short? If you can’t control returns (and as passive members of Super Funds, we can’t), then at least control the fees to maximise your chance of the best possible long-term return.

Sometimes, an individual Retail Fund will beat an individual Industry Fund, after fees.

Sometimes, it’s possible that Retail Funds as a group will beat Industry/NFP Funds as a group, after fees, in a given year.

But over the whole industry and over time? My money is squarely on Industry/NFP Funds. It’s just the law of averages.

So, if I didn’t have an SMSF? My money would absolutely be in an Industry or NFP fund, because I expect that probabilities will favour me doing better, after fees.

(Indeed, a few years back, I was part of the team that chose AustralianSuper as The Motley Fool’s default fund. We considered other for-profit and NFP funds, and went with AustralianSuper. And no, neither I nor The Motley Fool get any benefit of any sort from doing so, or by talking about it. We just reckoned it was the best choice of default fund for our team.)

Now, a couple of things:

If Retail Fund fees suddenly plummeted and were lower than Industry Fund fees, I’d change my mind. I don’t have an ideological preference, here, just a pragmatic one, based on the numbers.

And speaking of ideology: some readers will have an ideological opposition to their Super being in a fund with union involvement. Personally – and frankly – I think that objection is a little silly: we should invest our Super where it’s likely to get the best return, not with ideological fellow-travellers or away from ideological opponents. But… if I can’t make you think more pragmatically, that’s your call… and non-Industry NFP funds like Australian Retirement Trust or Vanguard might be worth checking out as very good alternatives.

Okay, but which Industry Fund? As I mentioned earlier, we went with AustralianSuper a few years back. It was (and remains) the largest fund, and had very low, if not the lowest, fees. And being the largest, it was likely to have the best chance of keeping those fees low, or lowering them further, so probabilistically it was our best choice at the time.

I am very happy with it currently being our default fund, though it’s probably time for us to do a review. But one of the best things is that other Industry/NFP Funds have relatively similar fee structures – so if there’s a lower fee option out there, it’s very, very unlikely to be meaningfully cheaper.

Which is also good news for members of other Industry Funds. The question I received this week was from someone in an Industry Fund, asking which one I’d recommend, compared to the fund they were already in.

As I said at the top, I can’t give personal advice, and the maths (see the fee example higher up) means that it’s possible that different funds are slightly better or slightly worse for different account balances, based on their mix of those fixed administration fees, administration fees as as percentage of funds, and investment management fees.

So fee-wise, any of the largest Industry/NFP funds are probably reasonably similar on fees, and any benefit from changing is likely small.

But… please check. There may well be some out there charging unnecessarily high fees – and the money is better in your pocket than theirs!

Phew… this is getting long. Did I mention Super was complex? If you’re still with me, thank you!

Let’s wrap this up.

Here’s how I think you should (generally) think about your Super Fund choice:

If you have a large enough balance (or the balance will be large enough in a few years’ time), and have the time, inclination and expectation that you can invest well – and want the flexibility that comes with the extra paperwork burden – an SMSF can be a great choice.

If you don’t want the time, hassle, stress and bother, and/or you don’t have an account balance that justifies the decent fee you’ll pay for an SMSF, an Industry / NFP Fund is be a great choice. And as long as you pick a decent-sized Fund, you’re unlikely to be paying materially more than another similar-sized Industry Fund when it comes to fees.

And Retail Funds? If you really like donating extra to the Australian financial services industry, then go for it! Okay, I’m kidding… a little.

These guys and girls are doing their best to grow your Super by investing well, but at the end of the day, history says you’re likely to do worse, after fees. Betting against both history and probability is usually a bad idea.

Me? I like the freedom and choice of my SMSF. But it only contains shares and a little bit of cash, so it’s not that complex. If there was a price-competitive Industry/NFP solution that allowed me to buy and sell just as I do in my SMSF, I’d probably jump at it to save me the paperwork.

Well done! You made it though the cook’s tour of the Australian Super system.

Sort of.

Don’t worry, I’m not writing anything more, today – but I will follow up soon with the question of ‘Which investment option(s) should I choose inside Super’.

Because, believe it or not, the way you invest your Super might (probably does, in many or most cases) have more of an impact on your final balance than the Fund you choose!

But that’s a whole other story. Until then!

Fool on!