Passive Investing is a Waste of Time

This article is based on one of my early encounters with a Superannuation advisor. Whilst it makes for amusing reading it also contains a serious lesson about reading fine print and constantly monitoring your investments…even managed investments.

At the fertile age of 20, just several months short of my 21st birthday, I received a phone call from a man who said he was a financial advisor and that he would like to set up a consultation with me to discuss my financial future. It was at no cost to me and he was very flexible as to where and when we should meet. Due in large part to his apparent ultraistic intentions and concern for my future welfare, I agreed to meet with him. At the time of the consultation I found myself in the presence of a tallish man, dressed in a very impressive double breasted suite, sporting just a touch of grey at his sideburns and wearing a friendly, obliging grin. My first thought was, having just left home and the watchful eye of my parents, how lucky am I to have such a serious and trustworthy looking individual looking out for my wellbeing.

Here was this obviously important man that I warmed to immediately who was going to look after me by taking care of my financial future while I worried about more immediate matters like girls and cars. He asked me if I had a superannuation policy as it was vital to my future wellbeing in retirement. He added that all sensible and mature people who didn't want to become a burden on their friends and family when they stopped working had one (Super wasn’t compulsary at this time). He then handed to me a document containing national statistics on the aging population proving that reliance on the pension in retirement was futile. Fear shot through my mind as it dawned on me that I couldn't even spell, 'Suporanuation' and I felt my face flush with embarrassment. Add to this my shame at being a future burden on the ones I loved and my confusion at the word 'Demographic' written on the piece of paper in my hand. I'd been on my own in the big bad world for a few brief months and look at the damage that I could cause by simply not knowing about something like, 'Suporanuation'.

I uttered in a whimper, 'What should I do?' He had prepared an important looking document with my name at the top of each page that contained the most fantastic news. If I contributed just $700 a year, ‘before tax so I wouldn’t even feel it’, to a superannuation fund then I would have over $300,000 to play with in retirement (a lot of money to a 20 year old in the early ‘80s). Well I nearly kissed the man as I realized that not only was financial Armageddon going to be avoided but I was going to have enough money to help others in retirement. The tone of the meeting relaxed and I blurted out a whole lot of meaningless stuff like, 'What's a demographic?' as you tend to do just after a near death experience.

But just as I was running out of things to say to this patient listener, he asked me with a hint of concern in his voice when my 21st birthday was. My eyes widened as the stiffness returned to my body and I replied, 'In 2 months…is that a problem?'. To cut a long story short, with parental like concern he explained to me that it was very necessary that I start the policy before I turned 21. With this revelation out in the open I nearly climbed into his lap, trying to get my hands on the superannuation policy that would change my life back to what it was the day before. Whilst this anecdote is based on a real event in my life, I have exaggerated it for the purpose of illustrating a point. I was dealing largely with a salesman and not a man with purely ultraistic intentions. I do recall that I was curious at the time as to why he required no payment for his services.

Now to the policy in question and the absolute facts regarding its performance over the next decade. The lesson here, in advance, is to read the fine print. The short version is that the printout I was shown containing figures that would have made Donald Trump drool, had very little in common with the actual performance of the fund. It was based on 15% annual interest compounding over forty years. My contributions, included in the printout, started at $700 per annum but increased over time in line with the then annual CPI figure. The 15% annual growth figure used was the current performance of the fund when I first entered into it. And like most individuals at the ripe old age of twenty something you tend to leave the superannuation policy in the bottom draw and simply go about life with the comfort of knowing its there.

After ten years of dutifully making the compulsory contributions to the fund and now having the option of not having to make any further payments I decided to fish out the policy and the original printout to see if I was still on target for my Villa in the Bahamas. The decision was also prompted in part by the constant increases in the annual contributions that were becoming a perpetual annoyance.

You can imagine my surprise when the actual performance of the fund, according to my annual statement, was approximately half the projected figure on the printout. I will demonstrate in simple form what happened to me and the power of compound interest. The following table shows the difference between the actual returns of the fund and the performance demonstrated on the printout based on 15%. For illustration purposes I have excluded my contributions and the funds administration fees and simply used a starting figure of $1,000 in both cases.

Year	Actual performance (avg 9%)	Projected performance(15%)
1	$1,090	$1,1501
2	$1,188	$1,322
3	$1,295	$1,521
4	$1,412	$1,749
5	$1,539	$2,011
6	$1,677	$2,313
7	$1,828	$2,660
8	$1,992	$3,059
9	$2,172	$3,518
10	$2,367	$4,046

 

My first point is that the interest rate is absolutely critical when you are compounding it over time. If I continue the above table for another 30 years to my retirement, the final figures are;

Year	Actual performance (avg 9%)	Projected performance(15%)
40	$31,409	$267,863

My figures were muddied by other factors such as my annual contributions, the actual CPI, increases to the administration fees and the actual performance of the fund. Regardless of this I was looking at a similar scenario and, as if by magic, I found myself with the phone to my ear, dialing a number that was also buried in the reams of paper they had sent me over the years. I had prepared my questions and the conversation went something like this…

Me - The growth on the fund doesn't match the figure used on the printout I was shown when I joined the fund…what's the story?

Consultant - The figure used for the projections was the most accurate figure available at the time you joined the fund. Have you been reading your annual statement and the annual report that we've been sending you every year?

(Pregnant pause) Me - No, but I assumed that if there was… (Cut off by the consultant)

Consultant - I do recommend that you take the time to read it, even if its not straight away.

(With an incredulous tone in my voice) Me - So you're telling me if I don't have enough money to retire, its my fault because I haven't read the material you've sent me? Surely there's some kind of guarantee on the performance of the fund?

(With an indignant tone in his voice) Consultant - Of course there is. It’s in your original policy document…haven't you read that either?

(With the sudden realization the situation was largely due to my neglect) Me - 'no' (With the sudden realization the situation was largely due to my neglect)

Consultant - I SUGGEST THAT YOU READ IT AND THEN CALL ME BACK.

Me - 'thanks…..bye'

I now went back to the reams of paper that I had accumulated over the years…not to mention the original policy document that I neglected to read in the first place. It was all there in black and white. The minimum annual growth guarantee (comparable to bank interest), notification of changes in administration fees for the forthcoming period and changes to my contributions based on the CPI including a complete explanation of the calculation being employed.

By burying it all in the proverbial bottom draw I hadn't lost a single cent and I was even showing a profit…but it certainly wasn't the sort of profit I expected after ten years. So I vowed from that day forth never to be a passive investor again…my time, where time is money, is too valuable.