Protecting Your Superannuation

IntroductionSuper has been given a lot of bad press lately. Many people have seen the value of their nest egg drop dramatically. But it is not the Superannuation system that is the problem, rather it is where your money has been invested that has lead to the drop in value.Many people are in the ‘default’ Balanced option that has a large exposure to the share market. This is good if the market is going up but not so good when it is going down. This article describes the simple steps I have been using since July 2007 to take back control of my super, stop the drop in value when the share market falls and still reap the rewards when it rises. I spend no more that a few minutes each week on it and I did it without starting my own super fund.ResultsBefore discussing the method in detail, let’s look at how it would have worked since July 2000. In the following charts, the results for the Switching method described here are always shown in Blue.Switching versus 60/40 Balanced versus 100% Australian SharesThis table shows the returns as of 30 March 2010 for the last 10 years, 5 years, 3 years, 1 years and 3 months. 10 years to 30/3/2010 5 years to 30/3/2010 3 years to 30/3/2010 1 year to 30/3/2010 3 months to 30/3/2010Switching 95.72% 45.31% 14.08% 4.66% -6.44%60/40 Balanced 67.50% 26.99% -2.13% 21.95% 0.82%100% Australian Shares 61.62% 19.86% -16.80% 33.26% 0.54%The chart below shows indicative returns for $10,000 invested in super in July 2000 using the Switching method described here versus 60/40 “Balanced Fund” versus 100% Australian Shares. (See the footnotes for assumptions made.)Most superannuation is in a “Balanced Fund”. The typical Balanced fund is 60% shares and 40% Cash.Following the super switching method discussed below, the $10,000 was switched between a 100% Cash Super Fund, returning a nominal 5%, and 100% Australian Shares Fund. The straight lines in the Switching plot are when the 100% of the balance has been switched to Cash and is getting 5%.As the chart below shows, this method has the desirable features of sustained grow in a variety of market conditions while avoiding deep losses when the share market falls.As the chart and table above shows, over this time scale the Switching method is substantially ahead of both the “Balanced Fund” and the 100% Shares fund..Consistency of the Switching MethodThe consistency of the Switching method is more clearly illustrated by the next three charts which shows the percentage gains (and losses) each calendar year from 2001 to 2009.These charts show that the Switching method has consistently return positive results since 2001. While both the 'Balanced' fund and 100% Australian Shares have had negative years and are much more variable in their results.The low variability of the Switching method from year to year is one of its key features as it gives me re-assurance that I can plan, each year, on having my superannuation funds available next year to support my retirement.Summary of ResultsSo, in summary, a check of the Switching method over the last 10 years (since 4th July 2000) shows a steady rise in value with low variability from year to year. And this consistency does not cost you growth. The performance table shows that over the last 10 years the Switching method is well ahead of both a Balance and 100% share fund, 95% increase in funds for the Switching method versus 67% for the Balanced Fund and 61% for the 100% shares option. (Again see the footnotes for assumptions made in producing these figures.) Having convinced myself that my switching method performed well, I started using it in July 2007.My Switching MethodStep 1: Selecting the Super FundTo use this method I need to be able to regularly change where my super was invested, shares, cash etc. Many funds only allow changes to be made a few times a year. This is not often enough to allow the transfer of the super out of shares when the share market starts going down and transfer it back to shares when the market starts going up.I found that AustralianSuper, an industry super fund, (www.australiansuper.com) allowed me to change the allocation of my super on a weekly basis with out penalty.Email me if you find other suitable funds that provide a similar service. Make sure you check the current terms and conditions before making your choice of fund. * www.hostplus.com.au, an industry super fund, say they allow weekly changes free of charge. * www.intrustsuper.com.au ,"Intrust Super, a 100% Industry Super fund, also allow their members to switch investments weekly and at no extra charge to the member." * www.agest.com.au “We do not currently limit the number of investment switches you can make, nor do we charge a fee for making an investment switch. However, we do reserve the right to change these arrangements in the future. We will give you at least 30 days’ notice if this is to occur.”I transferred all my super from my previous fund to AustralianSuper.Step 2: Internet AccessI need access to a computer with an internet connection to perform the checks described below and to advise AustralianSuper of my switch request. I have a computer and the internet at home, but could just as easily use the internet facilities at the local library or internet café.Step 3: Deciding when to Switch.Each weekend, I spend a few minutes performing the checks described below and then, if necessary, use the AustralianSuper web site to request a switch. AustralianSuper then actions the switch early the following week.If I am currently 100% in Cash, I am asking myself “Is the share market going up? Should I switch to Shares?”. If I am currently 100% in Shares, I am asking myself “Is the share market going down? Should I switch to Cash?”. Initially I transferred all my super to AustralianSuper’s Cash option.To answer the questions I use two Simple Moving Averages (SMA) indicators on the Australian All Ordinaries (au:xao), so first I will describe how I plot those indicators using BigCharts. (www.bigcharts.com). For more information on Simple Moving Averages search on the internetThe Simple Moving Average Indicators (SMA):To plot SMA(3), I first bring up www.bigcharts.com on my computer's web browser. At the main screen (sometimes there an advertisement I have to click through), I type in au:xao for the stock code and click on Advanced Chart. (i.e. the second button, Advanced Chart)This brings up a chart of the Australian All Ordinaries. (shown here as taken on 17th Sept. 2009)On the left hand side of the web page (shown above) I click on the “time frame” arrow and when the box opens I select “2 months”, “Daily”. I then click on the “indicators” arrow and choose “SMA (3-line)”, 10 and then click the Draw Chart button at the top to redraw the chart with these settings.There are three coloured code lines with their legend at the top of the chart, SMA(10) yellow, SMA(20) blue and SMA(30) red. If the SMA(10) line is above the SMA(30) line on the day I check then I take that as an indication that the share market is going up in the short term. If the SMA(10) line is equal or below the SMA(30) line then I think the share market is going down and I switch all my super to Cash.I only want to be in the share market when it is generally rising as well as going up in the short time and I want to be out of the share market when it is generally falling. As an indication of this I use a second SMA time interval of 40 (shown below)If the SMA(40) line is above the SMA(120) on the day I check, then I think the share market is going up in the long term. On the other hand if the SMA(40) is below or equal to the SMA(120) line then I thing the share market is going down in the long term.To see how this works look at the chart belowPlace a piece of paper over the second half of the chart and look at the SMA(40) and SMA(120) lines on the last visible date. Then slide the paper to the right and see how well the SMA line indicated the direction of the share market.As you can see for most of the down trend and most of the up trend, whether the SMA(40) line is above or below the SMA(120) line, is a good indicator of the direction of the market. But these lines change slowly and where they cross is always after the top and the bottom of the market.I don't mind being late to get back into the market when it starts to rise again but I want to get out quickly if it starts to fall. That is why I also use the SMA(10) over SMA(30) to make me switch early if the market starts to fall. The SMA(10) over SMA(30) lines move much more quickly and so cross sooner when the market starts to fall.Deciding When the Switch: The Rules I ApplySo now that I have shown the two sets of SMA indicators I use, here are the rules I apply to tell me when to switch from Cash to Shares and back again. I perform the following checks each weekend using the SMA values for previous Friday.If I have all my super in Shares, when do I switch to 100% cash?As soon as the Friday's SMA(10) line equals or falls below the SMA(30) lineORif the Friday's SMA(40) line equals or falls below the SMA(120) line.If I have any doubt about whether or not the line is on or below the other one, I assume the worst and switch to the safety of Cash.If I have all my super is Cash, when do I switch to 100% Shares?Here I am more cautious because having my super is shares is much more risky then getting 5% in Cash. Before I will switch my super back to 100% Shares, ALL the three following conditions need to be met. 1. the Friday's SMA(40) has to be above the SMA(120) line, indicating a long term rising market 2. the Friday's SMA(10) has to be above the SMA(30) line, indicating the market is going up in the short term 3. The All Ordinaries close on Friday must be above the All Ordinaries open on the previous Monday, indicating the market rose in the previous week.For condition 3) the left hand tick on each black bar is the open for that day and the right hand tick is the close. So left hand tick 5 bars (days) ago must be below the right hand tick for the last bar to satisfy condition 3).Again, if I have any doubt about whether or not one of the above conditions has been met, then I assume the worst and leave all my super in the safety of Cash for another week.Conclusion:I have found that by selecting an appropriate super fund and using the simple rules described above, based a chart of All Ordinaries index available on the internet, that I was able to avoid heavy losses in my super over the last few years while still making gains now that the share market is recovering. I sometimes lose money switching into Shares and out again, but I catch the major rises in the market while avoiding the major falls.Spending a few minutes once a week applying this method, lets me sleep peacefully every night when the share market goes in to a substantial decline because this method has has told me to put all my super into Cash and using this method also removes the worry about when I should put my super back into Shares as the market recovers.Footnotes:Assumptions used to produce the chart of indicative returns since July 2000 and since July 2006. 1. The Cash return was fixed at 5% per annum 2. The profit or loss was applied each time a switch was made. 3. A switch lodged on the weekend was executed at the opening all ordinaries index on the following Tuesday. 4. No dividends from the shares were applied and no superannuation fund fees were deducted 5. The superannuation Share Fund tracks the All Ordinaries Index. 6. The “Balance Fund” is 60% shares and 40% Cash and is rebalanced to 60/40 each 6 months on the first Tuesday in January and July

Protecting Your Superannuation