Don't fool yourself

When share markets have fallen and inflation has risen, many more investors will pay much closer attention to their actual investment returns - after allowing for inflation, investment management fees, and taxes.

Investors who concentrate on their nominal pre-tax, pre-costs and pre-inflation returns can really fool themselves about how they are faring on investment markets.

During the high inflation 1970s, some bond offerings, for instance, were highly popular among investors yet their advertised rates were actually lower than the rate of inflation at the time. Eager investors were actually losing money on the deal - in real terms.

Certainly, inflation is much, much lower today than in the 1970s and 1980s but it is currently on the rise again.

The TD Securities-Melbourne Institute's monthly inflation gauge, released this week, states that headline inflation (the "All Groups" index for a basket of goods and services) reached 4.5% in the 12 months to May 31. This marks a six-year high and takes inflation well above the Reserve Bank's target range of 2-3%.

Another issue involving investors possibly fooling themselves about investment returns will almost certainly occur when super fund members examine their funds' 2007-08 performance figures.

Whenever investment markets go through one of their negative periods, there is almost certainly a spike in the numbers of self-managed super funds being established. Many members of large funds convince themselves that they can do better themselves.

Some SMSFs do, of course, produce higher long-term returns than some of the big funds, but many do not.

If you are a member of a large fund with a growth or balanced portfolio, your fund is highly likely to produce a negative return for 2007-08.
Superannuation fund researcher Super Ratings reports that the median rolling return for balanced funds (60-76% in growth assets) was -2.88% for the financial year to April 30, and -1.17% for the 12 months to April. (These calculations are based on the 50 largest balanced investment options offered by super funds.)