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Do investment principles stand test of time?


Time travel is a skill that would dramatically transform the world of the investor.


Sadly, despite all the technological advances of the past two decades, the ability to go back or forward in time remains the realm of science fiction novels, not a killer app on an investor's smartphone.

While time travel may still be the domain of TV and film producers the passage of time is a real-world test for investment ideas even if - as we are constantly reminded - history is not a great predictor of future returns.

Twenty years ago the movie Shine with Australia's Geoffrey Rush starring as the pianist David Helfgott was lighting up the movie screens, while at the Montreal Olympic Games Australian athletes brought home 41 medals.

Australia was a country of 18.3 million people with a median age of 37 and the median weekly household income was $637 while the Reserve Bank cash rate was set at 7.5 per cent.

The fledgling superannuation system had accumulated assets of $312 billion some four years after the super guarantee contribution had been introduced.

In 1996 a new, more modest undertaking was getting started - it was the year Vanguard established its Australian business which was its first outside the US.

The market has changed markedly - of the top 10 companies by market capitalisation on the Australian sharemarket in 1996 half have either dropped out of the top 10 or are no longer on the ASX.

We decided to look at the past 20 years through the time capsule of three different investors in 1996 - a 40-year old man; a 20-year old woman and a newborn baby boy- and test how our investment principles have stood up during two decades of significant geo-political shocks, stunning market rises and dramatic declines that included a global financial crisis.

They are:
Goals: Create clear and appropriate investment goals 
Balance: Develop a suitable asset allocation using broadly diversified funds 
Cost: Use low-cost, transparent investment options 
Discipline: Keep perspective and long-term discipline

One of the first lessons we can take from looking back over the past 20 years is that investors have been rewarded for taking extra risk.

An investor who invested $10,000 back at the start of 1996 in cash would have seen the nominal value grow to $26,800. Someone who had invested in the Australian sharemarket index would have seen the portfolio value grow to $51,400. The US sharemarket index was just slightly behind at $48,100 while Australian bonds grew to $37,600.

For our three investors Rice Warner was asked to model the superannuation outcomes. Remember back in 1996 super was really just getting started so our 40-year old did not get the benefit of a full career under the super guarantee nor the higher rate we have today.

The growth in the super system has clearly been one of the major developments in the Australian financial landscape in the past 20 years with it now being the second largest financial asset in average Australian households and the system growing into a savings pool of more than $2 trillion.

So when you look back over the past 20 years it is interesting to see how the super system has performed - a topical political discussion as the government is currently consulting on defining the objectives of the super system.

For our 40-year old now turning 60 and with retirement firmly in sight Rice Warner project their super balance at retirement (assuming SG only contributions, average wages and a 7.5 per cent gross return) to be $217,000 in today's dollars. That is projected to last until they are 74 years old.

For the woman turning 20 in 1996 and effectively just starting out on their working life the projected retirement balance is $395,000 when they reach retirement age.

For the baby in our investor trio the projected super account balance is $456,000 - more than double what the 40-year - old is likely to get.

More importantly, based on the ASFA comfortable retirement standard, the baby of 1996 could reasonably expect her super to last 13 years longer than their older baby boomer counterpart.

Higher contribution rates and a long-time period to allow compounding to work is driving these outcomes but it is interesting to reflect that even after more than 20 years our super system is not yet at maturity and the challenge remains for those in the older age bracket to be able to contribute enough to fund their retirement lifestyle.


By Robin Bowerman
Smart Investing 
Principal & Head of Retail, Vanguard Investments Australia
10 April 2016