John Cameron's personal blog

Whenever you invest, there is a trade-off between risk and return, and this is undoubtedly true.

But, when it comes to measuring risk, things are not always what they seem.

The problem arises with the way in which analysts measure this risk.

When comparing different superannuation funds, how confident can you be that you are comparing “like with like”?

The short answer is “not at all”.

Generally when comparing funds, the media like to bunch all those with the same label (such as “balanced”) together, and then compare the performances. Funds are classified as “balanced”, “growth”, “conservative”, etc., depending on the split between “growth assets” and “defensive assets” within each fund. 

Anybody following the Hayne Royal Commission could be excused for thinking our superannuation system is broken. It is not – although parts of it need serious repair.

An excellent article in the Australian Financial Review of 18-19 August, addressed and dispelled a number of myths surrounding the superannuation system.

The author of the Chanticleer column identified the following myths:

One of the issues that repeatedly crops up when dealing with clients is, “How well placed are you to deal with unforeseen expenses?” 

The expenses can range from relatively minor things such as an appliance suddenly failing, a minor car accident or a leaky roof, through to things far more catastrophic – a major illness, death of your partner, loss of job, marriage breakdown or any of a whole host of other things.

I started thinking along these lines, on reading a story in the Financial Review on 1st July. The story reported a survey carried out by the US Federal Reserve, to assess the resilience of American households if some financial shock occurred.

Traditionally investments such as government bonds have been considered “safe”, whereas shares are considered “risky”.

So pervasive has this been, that, in the jargon of financial markets, when somebody talks about “taking on more risk”, what they are really saying is that they are selling bonds and buying shares (or using cash to buy shares). Conversely, if they are selling shares and moving to bonds or cash, they are “reducing risk”.

Now, it seems, the jargon is moving mainstream. I recently saw a retiree being interviewed on television. In order to make ends meet, he said he was “taking on more risk” with his investments.