Speaking recently on a podcast hosted by SMSF Adviser sister title nestegg, Stockspot founder and CEO Chris Brycki explained why simple investment solutions generally provide better results for SMSF investors.
Mr Brycki said that for the average person, “as much as the financial industry likes to sell the idea of trying to beat the market and trying to pick stocks and time when markets are going to go up or down, the reality is that for most people, it’s not possible”.
Not only for amateurs, but for professionals as well.
The investment expert said this has been the case for “30 to 40 years at least now”.
In Mr Brycki’s opinion, people shouldn’t be focused on those market factors when it comes to investing.
Instead, he said “they should be focusing on actually reducing their unforced errors or their mistakes”.
Those errors include “not diversifying enough, paying too much in fees and making too many decisions”.
Relating these errors back to the SMSF space, Mr Brycki provided three key considerations that SMSF participants need to be aware of to prevent them from making similar mistakes.
Diversification
The expert began by stating that “SMSFs historically haven’t been very well diversified”.
Looking at the data, he said “what you can see is that self-managed super funds in Australia have a huge overweight position in Australian shares relative to global shares, and that’s really been a disadvantage to their returns and their diversification”.
In addition, Mr Brycki highlighted that “they also have a big overweight position in cash”.
While conceding cash “ultimately did help some SMSFs weather the storm of the financial crisis”, he considers cash as missing several of the characteristics that are very valuable within bonds.
“Most SMSFs don’t have any high-grade corporate bonds or government bonds, which can really act as a cushion when markets fall and a much better and more effective cushion than cash,” he said.
Costs
Mr Brycki also paid attention to the large amount of data supporting the notion that SMSFs pay too much in fees.
“By paying too much, it actually reduces net returns,” he commented.
His view, is that one of the reasons people are paying too much “is because they are overcomplicating things”.
“They’re under the false belief that by adding more complexity and more different types of investments into their portfolio, they’re going to achieve a better return or a better result.”
“The truth is: that’s not the case,” he said.
Mr Brycki countered the notion by stating that investors are probably going to be better off “by actually having fewer investments and making fewer decisions and reducing their costs”.
Decision-making
Despite the overemphasis on decision making potentially leading to an increase in errors, Mr Brycki did highlight the importance of good decision making in an SMSF.
“One of the responsibilities of setting up an SMSF is being able to fight the temptations to make lots of different decisions,” he noted.
“I know as an investment manager, and I know from a lot of the friends that I have seen invest over the years, that the temptation to make lots of decisions and to chase hot things is very high when you’re managing your investments,” Mr Brycki continued.
“You really need the discipline not to do that.”
He recommends outsourcing such a responsibility “to someone that can help keep you honest and keep you on track with your own strategy”.
“Much like when you see a personal trainer — ultimately, all of those exercises you could do on your own,” he said.
“You could go to the gym, you could go for a run, but a personal trainer keeps you accountable and keeps you on track.”
Even for people that do set up in a self-managed super fund, Mr Brycki said he believes “there is some value in having that personal trainer there to keep your strategy on track, to stop you from making mistakes when markets have gone up or gone down and you’re tempted to change something”.
“Ultimately, that’s going to lead to better results at your retirement.”
