Medibank Private going public

So the big news this week is that Medibank private is going public. The government is selling shares in Medibank private and will be a publicly listed company on the ASX.

So, should we all be signing up to get as much of an allocation of the shares as possible?

When these large government owned companies are listed, mum and dad investors usually rush at the opportunity to buy these shares for some reason. Because they're well known, it somehow makes it a good investment?

The biggest government sell off in recent history was Telstra, Telstra's first sell off happened in 1997 with an issue price of $3.30. The stock then took off over the next few years and the second installment was then issued in 1999 at $7.40, people rushed to it because the first installment had over doubled. For the first month after T2 floated, it was looking good, the stock price peaked at over $9 but that is when the party ended, in a big way. The stock then spent the next 10 years slowly falling back to below it's original T1 list price and bottomed at about $2.60.

So what can we learn about the Telstra float and apply to the Medibank private float? NOTHING. It might take off over the first few years, it might not.

So, should you buy Medibank private on the float, or after the stock is listed or not at all. Well the reason you would pre purchase Medibank private shares is because you believe the issue price is less than what the market will value the stock on first listing. Is it cheaper than what the market will value it? I don't know, no one really does. It will purely be a gamble.

So, should you own the stock after it has been listed? Well, you would only do that if the market has priced stock wrong after listing and you believe it is undervalued. Will it be undervalued? I don't know, no one really does. It will purely be a gamble.

Investing in 1 particular stock over the market as a whole is speculating that the stock is going to outperform the market. That is speculation not investing. There is a notion that to be a successful investor, you use the information available to identify good stocks that will perform better than the other stocks. The problem with this idea of thinking is that other people don't have that same information.  But everyone has all available information and that information is used daily to price all stocks to fair value based on the risk of the stock  (ie. if the stock is riskier, the market will price it lower so that it has a higher expected return). Sure, tomorrow they are all going to perform differently, but that will be based on the new information available tomorrow.

So, what should you do? Forget the hype about big government owned corporations listing. If you want to invest to create wealth, diversify across the whole market and only take risk where there it has been proven that you are rewarded for the risk over the long term. Don't take bets on particular shares and remain disciplined.

I'm not saying that Medibank Private won't perform well, it very much might. Just like black might roll up next on the roulette table. Invest in Medibank Private if you so wish.

Three things you could do today to boost your superannuation

Superannuation is confusing so people often just neglect it for very long periods of their working life. So, I've put together a list of 3 simple things you could do easily today or over the next couple of days that will help make a big difference over the long term.

1. Check your investment option

Almost everyone, particularly those earlier in working life, has the default investment option. Usually called the Balanced fund. The Balanced fund or default investment option in most super funds has about 60-80% invested in growth assets and 20-40% invested in defensive assets. Anyone under 50 years of age has at least 10 years before they can access their superannuation so they can afford to take on the extra risk and volatility of a growth orientated portfolio. Check your super funds performance figures for the default fund and the high growth fund. The Precision Wealth Management 10 year return for the 70% growth portfolio compared with the 100% growth portfolio is 6.94% and 8.00% respectively (keep in mind the GFC was right in the middle there). If we take a typical situation, someone with $100,000 in superannuation and net contributions of $7,000 pa (increasing at 3%), the difference after 25 years would be $1,114,000 compared to $1,350,000.  Not a bad difference for choosing one option over the other.

Note: A higher growth investment option is more volatile and can at times provide lower returns than the other options. You need to accept this and ensure you are invested over the long term.  

2. Check your insurances

Superannuation funds, particularly employer sponsored funds have default insurance inside them. This is good as most people don't go to the trouble of making sure they have adequate cover.  Even though most young families don't have adequate cover, there are some people where the default insurance cover is more than they need.  Some single people without any dependents can have death cover which isn't needed, or maybe they have income protection inside superannuation which doubles up on a policy they already have outside superannuation.  If you can save $300 per year (increasing at 3%) in unnecessary insurance premiums, then you could add an additional $30,000 over 25 years.

Note: Most people, particularly those with young families don't have enough personal insurance cover. Carefully consider your needs before making changes to your insurances and seek advice if you are unsure.

3. Make additional contributions

To have the sort of lifestyle most of us desire in retirement, the standard employer contributions aren't enough and freeing up some cash flow to direct towards superannuation can make a big difference. The good thing about making contributions to superannuation is that they can come from pre tax income if salary sacrificed.  So if you can free up $50 per week from your budget, that is actually $75 of pre tax earnings (for someone on the 34% MTR, and even more for those on higher tax rates). If we take an example of $50 savings per week, grossed up to pre tax earnings and salary sacrifice that over 25 years (increasing at 3% pa earning 8% pa) that is worth an additional $318,000. For most full time workers, the best way to contribute to superannuation is via salary sacrifice however make sure you stay within your contribution caps. If you are a low income earner, making non concessional contributions (after tax contribution) to receive the government co contribution is a great little boost as well.

There are obviously other things that can been done to boost retirement savings, however if it gets too complicated, people won't do any of it. So this list of 3 is a great place to start and you don't need to do all of them. Even just 1 or 2 will help make a big difference over the long term.

Changes to superannuation - what it means to you

The government has announced last week that it will delay the phase in of the increase of the compulsory superannuation contributions to 12% and repeal the Low Income Super Contribution. They have also previously proposed an increase to the Age Pension Age. But before we go getting too upset at the current government, the previous Rudd/Gillard government reduced the concessional contribution caps, halved the superannuation government co contribution and also increased the Age Pension Age.

So what does all this mean?

It basically means that if you want a financially comfortable retirement, you need to take some responsibility yourself to plan and accumulate funds. I can think back just 5 or 6 years where we had concessional contribution caps of $100,000 and salary sacrificed contributions didn't count towards other government income assessment such as Centrelink entitlements and government co contributions.  Providing the person was earning a reasonable income, they would be able to accumulate a decent portfolio in only a few years. Now, with concessional contribution caps $35,000 or $30,000 and all the other reduction in benefits as well, people need to plan many many years in advance to give themselves a comfortable retirement.

Lets take a 25 year old. Earning $60,000 per annum and say their income will rise at 4% per year. They currently have no superannuation and we'll say they'll retire at age 60. We'll also assume that the employer contribution rate is 9.5% and stays at that throughout. If the average superannuation earning rate is 7% (net of fees and tax) per annum, they will end up with $1,223,558.

Seems like a lot! But if we discount for inflation at 3% it is the equivalent amount of $434,832 in today's dollars. With modern day life expectancy, this is really not enough for a comfortable retirement considering the governments moves to reduce the welfare available to Age Pensioners.

If that same person was to be able to save just $50 per week from the start from their cash flow and salary sacrifice the grossed up amount to superannuation, they'd end up with just over $2,000,000 in super which is about $712,050 discounted back to today's dollars. That is significantly more and would provide a much more comfortable retirement income stream. It's $50 per week. Most people spend much more than that on non essentials.

Do people do that? No. Why? well, I guess they want to spend the $50 per week now and hope for money later on. Or maybe complain when they reach retirement that the government doesn't do enough. Or maybe they'll try to create wealth very quickly near retirement through very high leverage and lose even more (ie. Storm Financial). As a financial adviser, I can't help anyone who doesn't want to help themselves.

We have been through a period where the generosity from governments in terms of concessions to build for retirement savings has been quite high, and now when the budgets tighten, the responsibility falls back to each and everyone to do something about their own future.  It's so easy to ignore wealth creation and perhaps for those around 25 to 30 or even 40, there is a lot going on. House, marriage, children etc, but don't wait until you are 55 or 60 and then think, I should really do something about my retirement because with all the changes happening to super, there will probable be less there than you think.