“Really, with the same strategy, starting every year, you could have had a whole different range of outcomes, whether it was starting in 1994, when bond markets went up and down. It really highlights that the first one or two years is vitally important in the first part of your journey.
Getting the boat off the wharf is the really important part, without getting smashed on the rocks in the first couple of years.
“If you lose 20 per cent [of your capital] in the first year, and you draw down 5 [per cent], you’re down to 75c [in the dollar]; you’ve got to do 33 per cent to get back to square. Then you draw 5 per cent and you’ve got 95c and you’re still not back at square. And so it goes on.
“Also, if you look at the last cycle, where people had two or three years’ cash put aside for income, and then the cash account started to dry up, the dividends were reduced and people looked to their mortgage funds and those mortgage funds suddenly froze, people had to turn to their growth assets at the wrong point in the cycle.
“[So we go] back to the drawing board again and say we’re not happy with this 20-year history. It hasn’t been the proudest of pasts. It’s been OK for some people, but the same strategy launched every month through every year of the 20 years has got wildly diðerent results.”
‘The purpose of super, really at the lower end, is to provide lifetime income’
Anderson says that instead of looking at “patching the best group of assets together to get the job done, we should look at it from the liability side”.
“What is it that I’m trying to achieve here?” he says. “It goes back to Grandma with her seven jars on the mantelpiece, with money for house- keeping in one, [money for] clothes in the next and for transport in the next one, and so on.
“So what are we trying to achieve here? Mark those off and lock them away individually. If you can do that without taking on additional risk, even better.
“Let’s actually focus on what we’re actually trying to achieve, whether it is three years’ worth of school fees, it is 10 years of age care fees or it is 30 years of retirement income, but focus on trying to achieve the income goal, not just trying to get outperformance chasing alpha.
“My belief is that it’s all about cashflow, managing cashflow – that will get you far better results than chasing alpha.”
Anderson says that after a planner has completed “an 18-page fact find”, an investor’s goals and income requirements – and how to achieve them – should be crystal clear
“What are your goals? Well, I want an emergency cash reserve; I want some bedrock income; I want some discretionary income, or they call it aspirational income, a holiday account, beyond the bread-and-milk stuff – and we’ve seen people layering their income like this,” he says.
“If you like that style of indexed income-for-life that the Government gives you, you can also buy it from us [in the form of an annuity]; and then on top of that you can have your allocated pension with a bit of growth and a more aggressive diversified income approach.
“The purpose of super, really at the lower end, is to provide lifetime income; it’s not really about estate planning at all. You’ve got $300,000, and it’s got to last you 35 years; forget an inheritance – you’re not in a position for that.
“If you’ve got $2 million, it’s a different story. So let’s commit this money to doing its job, rather than dancing around in circles and giving money to the kids and that kind of stuff. This is money that’s got to last you for the period.
“And the problem we have with the 89-year-olds, they don’t spend anything, because they grew up during the Depression and the war, and they’re very thrifty; but the Baby Boomers coming through are all very good spenders. And we’re living five or six or seven years longer, and we’re spending money three times faster – it’s just a train smash waiting to happen.”
Anderson says the key to meeting an individual’s income needs is “matching the assets to the liabilities”.
“We’ve got a person here who we’re paying for the next five years, and another person over here who we’re paying for the next 35 years – what are we buying to back those [liabilities]?” he says.
In some respects, the income products promoted by Challenger in particular are quite old-fashioned.
“A lot of the older guys are saying, yep, we did this 20 years ago, what a great idea, I’d forgotten about this residual capital value (RCV) zero-type strategy, where you put half your money in that and you put half your money in growth,” Anderson says.
“They’re saying, ‘We did that back in the 80s and 90s, and gee it worked well’. And I’m saying,‘Well, what changed?’ I think the advent of the wrap probably pushed them that way, where they all decided to manage the sector funds themselves.
“So to get them back now and say, we’ve not made a mistake, but we need to have a hard look and say, well, did we stray from the path? But I think it’s a matter of layering all these different strategies together: have your guaranteed strategy; have your diversified asset strategy on top of that, but up the pyramid.
