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Welcome to Firstlinks Edition 326

  •   3 October 2019

Last week, the Government announced the first Retirement Income Review since the 1993 Fitzgerald inquiry into national savings, which followed the introduction of compulsory super by Paul Keating in 1992. As background for this new Review, we have selected six Classic Articles, including one from Keating himself, which many readers would otherwise miss. These special pieces were highly popular when first published and all had something different about them.

The Government's Terms of Reference for the coming nine-month review say:

"The review will look at the three pillars of the existing retirement income system, being the age pension, compulsory superannuation and voluntary savings. (It) will cover the current state of the system and how it will perform in the future as Australians live longer and the population ages." 

Notably, while the Government has already ruled out including the family home in the age pension assets test, there are references to both 'fiscal sustainability' and 'appropriate incentives for self-provision in retirement".

It's therefore a good time to dip into the archives for some classic insights, and there's nowhere better to start than with Paul Keating, father of our superannuation system. He admitted in this 2013 article that SMSFs were a late afterthought, and now they're the largest super segment. Keating gave some valuable guidelines for asset allocation:

"So, Australia is 2.5 times more heavily weighted into equities and relatively underweight other asset classes. We are disproportionately weighted into the most volatile and unstable asset class."

In the same year, Justin Wood's spending guidelines for retirees took up a similar theme. He used Yale University's endowment fund as an example of an investor with long-term obligations subject to short-term markets. It's fascinating, therefore, to check how Yale has changed in the subsequent six years. Here is their latest asset allocation taken from their website.

Yale's Chief Investment Officer, David Swensen, is a legend in the US, delivering an extra $4.5 billion in value over the last decade versus the average of other endowments, while delivering 11.8% pa for 20 years. He is a great believer in the value of active management, here in 2017 disagreeing with Warren Buffett:

"While Buffett appropriately recognizes the challenges investors face in manager selection—perhaps most notably that the vast majority of managers who attempt to outperform fail after taking into account fees and expenses—his conclusion goes too far. The superior results of Yale and a number of peers strongly suggest that active management can be a powerful tool for institutions that commit the resources to achieve superior, risk-adjusted investment results.

He has changed his asset allocation such that US equities are now only 3.5% of assets and most of his holdings are in unlisted assets, venture capital or absolute return funds which are difficult for retail investors to access. He invests differently because he is not seeking to beat a benchmark but achieve long-term stability for the future security of Yale's funding. Swensen's main lesson is: invest according to your own goals and don't be paranoid about the market.   

Here is how he differed from other educational endowments in the US in 2018:

Which is a good link to Chris Cuffe's Classic Article on the mistakes most people make in thinking about investment risk, and he draws on Howard Marks to give his own definition of risk.

Noel Whittaker is Australia's best-known personal adviser and best-selling author, and in 2018, he provided his quick-fire 20 Commandments of Wealth for retirees. Timeless wisdom!

And finally, in a change of pace, two unconventional articles that were big hits in 2016 and 2017.

Jo Heighway draws on her many years as an SMSF specialist with a unique perspective on how many of her clients are so passionate about their SMSF that it becomes a biography of their life.

Then Alex Denham tells a personal and precautionary story about her father's experience with aged care, which all her years as a financial adviser did not fully prepare her for.

(Note that some of these authors are no longer in the role described at the bottom of the articles, and some of the rules and numbers may have changed but we have not reedited the words).

Back to new and 'first link' articles next week, and remember there are thousands of articles in our archive covering almost every financial topic.


Graham Hand, Managing Editor

For a PDF version of this week’s newsletter articles, click here. For a PDF version of the article on the Retirement Income Review, click the 'Print' button at the top of the article.



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