go for growth?

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I made a bit of hay about the asset allocation of Aussie savers in my post about the bias of the tax system against fixed income. I had in mind the following charts from the OECD’s review of pension fund asset allocation.

The conclusion I drew from these charts is that being overweight equities was a bad decision.  Here are the charts I had in mind.

Asset allocation:


Not only are Aussie funds overwight relative to their peers – they are over benchmark:

To balance things, however, I think it’s worth pointing out that the expected return on an equity portfolio over a long period is greater than the expected return on a defensive portfolio.  These charts are from the Australian Cooper review of the superannuation system.

This charts suggests that you are best off in the growth option:

The bottom line of this review is that if the next 40yrs for equities is like the prior 40yrs, one would enjoy a higher standard of living if one went for growth.

I suppose the relevant question is if the next 40yrs will be like the prior 40yrs. there are reasons to be optimistic (Asian development will increase global GDP by quite a lot) and reasons to be pessimistic (the developed world is highly leveraged and balance sheets remain vulnerable).

Myself, I’m going to invest in inflation linked Aussie State government securities. Real yields around 3% are good enough for me!

these charts aren’t really on topic, but i found them interesting —

fees by asset class (shares have higher fees — so buy an ETF / index fund):

this one is for the geeks — age at death if you live to 65

this last one captures the neccessity of the super system – and also the inevitable crisis for Australian State Government budgets – which will be 100% swamped by health spending inside the next 40yrs. Of course, the Commonwelath will have to take the health system over …

One comment

  1. The major thing these don’t do is look at the pool of available assets – i.e. because there is not much government debt in Australia and a small (domestic) corporate debt market does that mean that super funds will naturally invest in equities – conversely in Japan there is a natural bias to own government bonds because there is a lot of it out there.

    If all Australian funds wanted a 25% government bond weighting over this period, there simply wasn’t enough government debt for them to buy – I suspect this has a lot more to do with asset allocation than many trustees will admit…

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