Investors, sports fans and financial advisers share a common interest in the power of numbers.
For sports fans, the score in a sporting contest provides the ultimate result – win/lose or draw – just ask Andy Murray or Serena Williams.
For investors and the financial advisers working with them, finding an ultimate number to measure investment success can be elusive.
Numbers are certainly powerful anchor points for the way people invest – whether it is a portfolio’s gross performance results, an individual company’s price-earnings ratio or the yield on a rental property – those numbers can all be strong influences on investor decisions.
When it comes to superannuation and retirement savings the quest continues to define the critical numbers.
For a start, the federal government says all Australian workers will save 9.5 per cent of their pay into superannuation but the perennial question is will that really be enough?
And if not then how much is enough?
The government is proposing to alter the tax status of superannuation balances above $1.6 million in retirement. Does that mean $1.6 million is what we should all be aiming for?
Or do we need to think about this in a different way?
At a recent major financial adviser conference in the US hosted by research group Morningstar, different approaches to the traditional way portfolio performance is reported was a key area of discussion in the context of how financial advisers can add more value for their clients.
A key principle that underpins the Morningstar work is that people invest to consume – they don’t derive “utility” from wealth, they derive utility from expected consumption.
This seems particularly relevant when we are saving for our retirement – we are saving today in order to fund our lifestyle in the future.
So rather than target a particular dollar value – like $1.6 million for example – or possibly a portfolio return number Morningstar argues the value proposition for advisers is more about working with investors to set up their lifestage goals. Here we are talking about retirement savings but the investment goal clearly depends on your individual ambitions and it could just as easily be setting up an education fund for children or a lifestyle property or that overseas trip.
A number of advisory firms in Australia are already practising the goals-based investing approach. What the Morningstar work shows is the evolution of the planning process to focus on the long-term strategy of the portfolio and its investments as a means to an end.
A lot of the focus today is on the annual return of our super fund portfolios – regardless of whether is an institutional fund or an SMSF.
As more of the baby boomers enter retirement and begin drawing down on their superannuation the more critical number that will tell you whether you are on or off track is likely to be your annual spending rate.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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