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The importance of the index approach for your Super.

In other posts I have hit on the importance of getting the most out of your superannuation fund returns. So how do you do it? There’s absolutely no shortage of managed funds, investment vehicles and investment styles available to superannuation investors in Australia. The choice can be quite overwhelming.
For me it’s all about risk V's return.  You can chase speculative investments in the hope you can increase your returns. You may get lucky even if only in the short term.
Reality is, speculating is not investing. It’s gambling with your capital and your future. 
On the flipside, you can be completely risk adverse and invest all your superannuation in a cash account. Sure, it will always be there, but it won’t go up. 
The spending power of your money will be eroded by inflation. There is also a huge opportunity cost of missing out on gains that can be safely achieved elsewhere.  
So, we look at investment styles. Do we invest in active investment where you rely on the expertise of a broker to select specific shares and investments to gain higher performance or do we take a more passive approach and invest broadly across markets?
One of the strategies used at Hindsight Wealth when investing superannuation is indexing. So, what is indexing?  Indexing is an investment strategy that attempts to closely match the investment returns of a specific group of shares, bonds or other securities, usually represented by a recognised benchmark such as the ASX All Ordinaries Index or ASX200.
Indexing simply takes the average of what the share market does over any given period. Seems boring? Advantages of indexing are significant. The risk is reduced as you’re not relying on someone to pick and choose for you.
There’s a famous quote by America’s most successful investor, Warren Buffet that says, "The stock market is a device for transferring money from the impatient to the patient." 
So next time you’re sitting down to dinner and the finance report comes on at the end of the news, take note of what is said. It’s likely they’ll report on the Australian market and refer to the All Ordinaries and ASX 200.
If your superannuation is invested in index funds, this is what you broadly need to follow. As I write this, the Australian market is up about 0.5% for the day but Rio Tinto is down 0.6%, Santos is down 1%, AMP is up 1.5% and ANZ is up do you pick it? You don’t, well not consistently anyway.
How can someone consistently determine which are the best stocks to buy? On any given day BHP might go up, CBA might go down and RIO may remain unchanged. Why try and predict this when the average of all Australian companies gives a return over time that is lower risk?
Risk is reduced by the fact that a single company is far more likely to go broke than the entire market. Markets go up and down but over time they consistently provide an average return that when applied to an individual super fund will result in solid capital growth over the medium to long term.
I’ve just finished reading a report released from the US regarding investor returns compared with the market average. Over there, they use the Dow Jones or S&P 500 index. In the US, the median investor earnt about 6% per year over the last 5 years while the market average was 13%. Over 30 years they earnt 4% per year while the market averaged 11%. 
Simple reason is investors let their emotions get in the way of their investment decisions. They buy high and sell low. One of the golden rules is the importance of “time in the market” rather than “timing the market”, this philosophy is particularly important when it comes to superannuation.


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