Barefoot Investor by Scott Pape is one of the best selling books in Australia. I read the book a couple of years ago, and the book positively impacted me financially.
Superannuation is a big topic when you talk about personal finance in the country. Your employer pays super to your super account and you save it for retirement. I believe many people have a super account with a bank. You probably have a bank account and you don’t want to bother to go to another bank for a super account.
However, the gist of Barefoot Investor’s tips for superannuation is reducing fees and allocate more salary to you super. Let’s first talk about reducing fees.
Saving Superannuation Fees
Before we talk about Superannuation fees, we need to understand them. As this Canstar article explains, there are four major fees.
- Administration fee
- Investment management fee
- Performance fee
- Other fees including an advice fee, investment switching fee and buy/sell spread fee
Among these, the Barefoot Investor points out that there is a way to save the investment management fee. What is the investment management fee then?
Investment Management Fee
This fee is charged by your super fund for managing your investments. This type of fee is charged as a certain percentage of your super balance. That percentage can be different from the super institution. As of May 2020, the investment management fees from the big four banks:
- Commonwealth Bank: 0.75% p.a. (investment and administration fees combined)
- NAB: 0.65% p.a.
- ANZ: 0.5% p.a.
- Westpac: 0.15% p.a. – 1.35% p.a.
The investment management fee typically does not appear in your super transaction statement. The fee is deducted from your investment option every month and an accrued amount is included in the unit price. If you have a ball-park balance amount of your super, try to apply these per-annum percentage to your amount. If you have $100,000 in your balance and if we apply the ANZ’s rate, it is $500 per year.
Considering superannuation investment is for the long-term, an accumulated fee amount will be quite significant.
Zero Investment Fee
So, what the Barefoot Investor recommended in his book was switching your investment fee-charging super fund to another that doesn’t. In his article, he mentioned one super institute called REST that has a zero investment fee for index investment options.
If you look at their investment cost table, there are currently three options with zero investment fee.
- Balanced – Indexed
- Australian shares – Indexed
- Overseas shares – indexed
Note that not all of their investment options are free of fee. Only these three are. Also, their administration fee is not complementary. But, without the investment fee, you are saving a lot every year, which makes a big different after 10, 20, and 30 years.
Our next question would be what are those index funds and are they safe? Did they perform well?
What are index funds?
We have to understand the index funds. There are many types of index funds in the world, but the gist of them is buying many different stocks together so that we can avoid a loss that can be caused by putting all your eggs in one basket. This means that it is safer than relying on a single share. Historically, low-cost index funds worked better than managed funds according to Scott.
How did they perform?
In the Scott’s article, he shared statistics regarding the performance of low-cost index fund compared to 1,000 managed funds. The research was carried out by Standard and Poor’s (S$P) – the rating agency. The results say:
- Nine in ten (87%) international share funds failed to outperform a simple low-cost index fund.
- Eight in ten (77%) Australian share funds performed poorer than a simple low-cost fund did.
In addition to the Barefoot Investor’s recommendation, Warren Buffet said that index funds are “the most sensible equity investment” for most people. Let’s have a look at the returns of the top 5 index funds in the U.S.
- Fidelity 500 Index Fund (FXAIX): 31.47% in 2019
- Schwab S&P 500 Index Fund (SWPPX): 31.44% in 2019
- Vanguard 500 Index Fund Investor Shares (VFINX): 31.33% in 2019
- State Street S&P 500 Index Fund Class N (SVSPX): 31.26% in 2019
- SPDR S&P 500 ETF (SPY): 31.22% in 2019
Please note that the past performance shouldn’t be used to predict the future’s but all of these 5 index funds returned more than 30% in 2019. This article from Investopedia – an investment expert website – summarised, “Index investing has been gaining momentum over the past decade, with passive funds often outperforming for their active counterparts for lower cost.“
The chart below shows the historical movement of S&P 500 Index. There have been many fluctuations and downs during the major global economic events. However, it eventually recovered from them and shows an uptrend spanning over the long period.
Let’s have a look at the Australian index, ASX200.
The ASX 200 is an index of 200 largest stocks in Australia. Due to COVID19, there was a steep decline in the early 2020. But, as the history of S&P 500 showed, it can be recovered.
Index Funds in REST
We have learned about the American and Australian funds and how they performed. REST has similar funds as mentioned above. The concept of these three funds is the same as the S&P index funds’.
- Australian Shares Index Fund: binds the 300 biggest companies in Australia such as the big banks, Woolies, mining firms, Sydney Airport, and more.
- Overseas Shares Index Fund: binds the 1,576 biggest companies in the world such as Amazon, Alphabet (or Google), Toyota. Dividends are automatically reinvested in Australian dollars.
- Balanced Index Fund:
- 30% Australian shares
- 45% overseas shares
- 20% bonds
- 5% cash
Will it cost to switch to a new super fund?
If you have become convinced to move to the new fund that doesn’t charge an investment management fee, there is good news. It has been typically charged with an exit fee of $68 when you switch from your old super fund to a new one. However, since 1st July 2019, the exit fee will be banned. So you don’t have to pay a penny to move your super funds.
15% Super Contribution
There is another super advice mentioned in Barefoot Investor. If you are employed, your typical contribution to your super from your employer would be 9.5%. The Barefoot Investor suggested raising it to 15%. Why? That’s because you will not pay tax for the increased portion. Adding to your super contribution is called salary sacrifice. According to the example the author shared in the article, if you are earning $80,000 per annum, you can reduce your tax bill by more than half by diverting your salary to super.
Scott Pape has given essential personal finance tips in Barefoot Investor. He still sends out emails to subscribers with stories and additional advice.
Among many things, your superannuation is one of the most critical factors for your financial success. If you could understand the points and decided to take an action, that’ll be a huge win!
Of course, financial situations can be different so please make sure you have some time to speak with an expert before making a final move.
If you’re interested, check my other posts about salary sacrifice providers.