Self-Managed Superannuation in Retirement: A Personal History through the Global Financial Crisis
by
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Chapter 6 THE GLOBAL FINANCIAL CRISIS
The effect on stocks
On 20 July 2007 the value of the stocks in our self-managed superannuation fund was $582,630. Following the GFC the value of the stocks decreased by 56% to $253,911 on 6 March 2009. Although things looked grim, I did not panic and I did not sell most stocks. However, I did sell some with low dividend return and bought others with a greater return. The value of stocks increased from 2009 through to 2016. The dividends from the stocks has also increased every year from 2006. The steady increase in dividends plus franking were the result of replacing stocks with low or falling dividends with those giving higher dividends. It is of interest that the dividends received from 2006 to 2016 gradually increased even through the financial crisis. This was particularly important as a retiree as I required this cash flow for day to day expenses.
Just as the global financial crisis had a dramatic effect on the worth of stocks, a similar effect was seen with the property trusts. The peak value for my property trusts in 23 February 2007 was $651,151, falling to $315,214 in 17 June 2011, which was a drop of 51.6%. Whereas the fall and subsequent rise in stock value was reasonably rapid, the decrease and subsequent slight increase in property trust was far slower (graph1). The value and income from distributions peaked in property trusts in June 2007 and 2008 respectively. The value decreased by 48% over four years and distributions by 77% over three years. Distributions increased gradually from 2011 to 2016. The lack of finance brought about by the GFC had a different effect on stocks and property trusts. The stocks were fortunate in that shareholders were willing to invest in cash and the shares recovered quickly. The property trusts were not so fortunate.
The effect on mortgage funds Like property trusts, the GFC reduced the funds available which had a deleterious effect on property prices and sales. This in turn prevented buyers and developers repaying their loans.
All three funds were being wound up in 2013. As already stated City Pacific Mortgage Fund distributions ceased in August 2008, while LM Mortgage Income Fund ceased distributions in July 2011. Distributions decreased but continued normally with the Australian Unity High Yield Mortgage Trust. As capital was redeemed to investors the value of the funds therefore decreased (graph 1) and distributions also decreased (graph 2). The three funds were not successful and it is unlikely that I will ever invest in Mortgage Funds again.
The effect on my superannuation fundThe peak value of my superannuation fund was in 2007. This was the height of a bubble and I was fortunate to have started the self-managed fund in 2005. The increase in the value of the fund during 2006 and 2007 cushioned the shock of the GFC. The value of the fund decreased from 2007 to 2009 and has flattened out from 2010 through to 2016. The increase in stock value has moderated the fall in value of the property and mortgage funds (graph 1). It is a similar story with income. The dividends and franking credits have cushioned the fall in distributions from the property and mortgage funds (graph 2). The value of and the income from the fund is approximately 40% below the peak value in 2007. The changes made to the portfolio following the GFC have allowed the value and income to increase. The removal of eight property trusts to be replaced with four more promising trusts allowed for an increase in value and distributions in the future (table 8). It has to be noted that I have been withdrawing my living costs from the fund over the ten years. From 2006 to 2016, dividends plus franking and distributions from property trusts and mortgage funds have provided an annual income of $86,892. I have spent $103,500 annually over this period. Thus, I have spent approximately $14,000 of capital annually. Fortunately, the increase in value of stocks and property trusts was greater than $14,000 and the value of the superannuation fund has slowly increased.
The fund now provides these living costs mainly from dividends plus franking and to a lesser extent from distributions. Thus an increase in value of the stocks and property trusts should bring about an increase in superannuation fund value. I can live in hope.
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About the Book
This is a personal story and is in no way to be taken as financial advice. I have described the successes and failures that were experienced during the ten years from 2005 to 2016, a time when the financial markets plunged due to the global financial crisis (GFC) and the subsequent recovery. Investments were made in stocks, property trusts, mortgage funds, and fixed interest. With this approach, an annual income from dividends and franking, distributions, and fixed interest was maintained. Although the capital and income were reduced from 2008 through to 2016, they have increased annually. Long may it continue.
Fortunately, the fund was started in 2005 and double-figure returns were received through 2006 to 2008. At this time, the investing game seemed easy. Everything changed with the GFC. The value of our shares decreased by 56 percent and the fund by 40 percent; it was a worrying time for everybody. In this book, the changes made to the portfolio to combat the fall in income and value of the fund are described. And although in 2016 the fund has not reached 2007 levels, it shows signs of recovery.
This book does not outline a fail-safe method for running a self-managed superannuation fund. Do not believe anyone who professes to have one. However, the information provided hopefully will encourage other retirees who wish to set up their own self-managed superannuation funds. Inevitably, mistakes will be with made. Everybody will make the wrong choices at times and lose money. In the long run, one just has to pick more winners than losers.
About the Author
The author was born in Glasgow, Scotland, in 1940 and migrated to Australia in 1962. He has a bachelor of science (1970) and a master of science (1973) from the University of New South Wales, a doctor of philosophy (1982) from the University of Queensland, and finally a doctor of science (1995) again from the University of New South Wales. Employment was initially with the Anatomy Departments of Glasgow and New South Wales Universities followed by the Australian Atomic Energy Commission, the Commonwealth Scientific Industrial Energy Organisation, and finally, the Anatomy Department in the University of Queensland, from which he retired as the head of department in 2005.
His research interests were in mammalian reproduction. The major advantage obtained from his academic career, which aided the management of his superannuation fund, was the maintenance of accurate records. Throughout his employment with the University of Queensland, he was a member of the UniSuper superannuation system. With the assistance of a financial planner and an accountant, a self-managed superannuation fund was set up in 2005 with the author and his wife as trustees. From 1996 to 2005, money was invested in mortgage funds, property trusts, and stocks, and these funds along with the monies from UniSuper were transferred into the new self-managed superannuation fund.
In 2005, 33 percent of the fund consisted of stocks, 41 percent in property trusts, 24 percent in mortgage funds, and 2 percent in cash. These percentages have changed over the last ten years, and in 2016, the proportions were 65 percent in stocks, 33 percent in property trusts, 1 percent in mortgage funds, and 1 percent in cash.
The author is a long-term investor and has outlined the conditions for buying and selling stocks and property trusts. He has written this book with the aim of assisting other retirees with self-managed superannuation funds.