How to use your super to pay for financial advice

I came across a report recently by fund manager Vanguard. It looked at the portfolios of more than 100 financial advisers, identifying a few common mistakes.  

I should add, the report made it clear that advisers are getting the big calls right, but a few hidden biases could be costing their clients in terms of portfolio performance.  

It got me thinking about the real-life mistakes I’ve seen investors make over the years - both my own clients and the many people who get in touch with me about their investment experiences.  

With this in mind, let’s take a look at common portfolio bloopers that can leave investors short-changed on returns or facing more risk than they realise.

1. Holding too much cash

In uncertain times, stashing cash away can feel like the right thing to do. What’s amazing is just how much cash Australians have been squirrelling away despite high living costs.

Households had $1.74 trillion sitting in bank accounts in April, up from $1.68 trillion last October. That’s an extra $61 billion in deposits in just six months.

Sure, savings are the bedrock of wealth, and it always makes sense to have cash for emergencies. However, cash isn’t a driver of long-term returns. In today’s environment of high inflation, holding solid chunks of surplus cash can see the purchasing power of your money go backwards.

Despite this, Vanguard noted that even among professionally advised portfolios, cash “remains elevated”.

This could be a cue to consider whether your own portfolio is top-heavy in cash. If it is, and you're comfortable taking on more risk, the reward can be higher long-term returns including the capital growth needed to outpace inflation.

2. Focusing on homegrown investments

Vanguard found financial advisers can have a “homegrown bias”, and while this was in the context of fixed income investments (notably bonds), individual investors can easily feel uncertain about investing outside Australia.

There are good reasons for this. Aussie shares have the tax advantage of franking credits on dividends, there are no currency risks, and we’re usually just a lot more familiar with homegrown investments.

Even so, there are compelling reasons to add an international flavour to your portfolio.

Think of it this way. Your job is likely to be tied to the Australian economy. You’re paid in Aussie dollars. If you have a home loan, chances are, it’s with an Australian bank, and your home gives you exposure to the Australian property market.

The upshot is that your financial wellbeing is already heavily linked to Australia before you even start looking at your investment portfolio.

The appeal of adding global investments to your asset mix is the diversification it provides. It’s a chance to access industries that are poorly represented in Australia like semiconductors and artificial intelligence, defence, and big pharmaceuticals. It can also let you tap into the growth of regions experiencing rapid development like Southeast Asia.

Investing internationally used to be expensive, often involving high brokerage costs or hefty fees on unlisted managed funds. That’s all changed thanks to the growth of exchange-traded funds (ETFs), which have made it a lot easier and cheaper to get global exposure.

Today, you can choose global ETFs that focus on shares, international property, and overseas bond markets, all of which have the potential to boost portfolio diversification.

3. Not understanding the “why” behind investment picks

One point noted by Vanguard is that advisers tend to build portfolios based on a central diversified core, surrounded by “satellite” investments.

It's a popular strategy, often termed the “core and explore" approach. Any investor can use it by having, say, share-based ETFs as the long-term core of their portfolio, then adding other investments as satellites.

The key is to have a clear purpose when choosing your satellite investments. What goals will they help you achieve? Do they raise the risk of your portfolio? And could you be doubling up on investments already held in your core ETFs (which only reduces rather than increases diversification)?

Australians have a wealth of investments to pick from these days. What matters is that you research any option you’re thinking of – the provider, the risks and the fees involved. And consider why you are selecting a particular investment. A tip-off from a mate, a new TikTok trend or an enthusiastic marketing email from a broker are not reasons to invest.

The basics don’t change

No one likes making mistakes, but all investors do from time to time, and as Vanguard’s analysis shows, even the professionals don't always get it right.

The great thing about investing is that you don’t need professional advice to enjoy long-term success. While markets may change, the basic building blocks of wealth creation remain the same, with three factors doing most of the heavy lifting:

• The investments you select (that's your “asset allocation”)

• How diversified your portfolio is

• How much you are paying in fees and other costs.

ETFs have made it so much easier to tick all three boxes than in the past. Better still, you don’t need much cash to get started, and it can be hard to go wrong once you know the common mistakes to avoid.