Insights
Why the All Ords index can’t predict your super fund performance
Economic indicators are just one of many tools you can use to guide investment choices
Many investors like to keep an eye on the markets in general, or to watch the prices of assets they’ve invested in. When things are going well, this can give them confidence in their investments, but poor market performance can also undermine those good feelings. There’s danger in comparing big market indices to the performance of personal investments because they are seldom similar enough to be truly correlated.
There’s nothing wrong with watching the markets, in fact, many investors make quite a hobby of it. However, it’s important to educate yourself on what particular indicators mean and how relevant they are to your individual situation.
Economic indicators
According to Investopedia, economic indicators are ‘key statistics that indicate the direction of an economy’. There are three kinds of indicators, leading, coincident and lagging.
Leading indicators include consumer durables and share prices, and are used to predict which way an economy might move in the future. A coincident indicator (GDP, employment and retail sales) reflects the current state of the economy and relate to specific economic events. Lagging indicators are calculated and released once certain economic events are over. These include Gross National Product (GDP), Consumer Price Index (CPI), unemployment rates and interest rates1.
Many indicators are released on a regular schedule and the markets anticipate them, try to predict them and use them to influence future activities.
Your financial adviser is always watching economic indices
Using indicators to predict future economic movements is fraught with danger for the inexperienced. Using one indicator alone doesn’t give a holistic view of the economy and using too many can be confusing. This sort of in-depth knowledge is something you would expect your financial planner to possess and able to give you advice on, if you needed it.
The All Ordinaries Index
A popular economic indicator followed by many investors and advisers in the financial markets is the All Ordinaries Index, considered the leading indicator of the Australian Share Market2.
Keep an eye on it but don’t depend on it.
The All Ordinaries (affectionately known as the All Ords) Index was established in 1980. It measures the value of the 500 biggest companies listed on the Australian stock exchange. This index gives an indication of the value and health of the Australian economy as it represents a large chunk of its listed corporations. Over time it has risen and fallen, and hit a peak of 6873 in 2007 which it has yet to reach again. As we write this, it’s hovering in the early 6000s.
Don’t think tracking the All Ords will give you any more than a general indication of what your particular share portfolio or super fund is up to. As an investor, the numbers you should be keeping a close eye are those of the companies you own shares in3.
While superannuation funds are certainly after capital growth for their investors, they are also after smooth, steady income. Therefore, the mix of shares and other assets (property trusts, infrastructure assets) they will choose to make up your fund will not necessarily resemble the All Ords4.
Your investments will never directly align with an index and that’s ok.
Don’t worry that your retail super fund or your SMSF isn’t doing the same as the All Ordinaries, because it can’t. By all means keep up with the latest economic indicators, but don’t expect them to signpost what your own investments are likely to be doing next. If you invest in a retail fund, you can expect fund managers to have carefully combined share assets with property and infrastructure to help smooth your income and capital growth and to protect against share market volatility. If you have a self-managed fund, you’ll know exactly which shares you’ve invested in.
If you’d like to educate yourself further in economic indices and their influence on markets (and vice versa), speaking to your financial planner is an excellent start. It’s their job to be across market statistics and indicators of all kinds. They can also tell you which indicators are most relevant to you, and how to tell a ‘blip’ from a more serious unwelcome trend.
Do you love the economic news and the financial press? Or do you prefer to leave it to the experts? Contact our financial planners at Modoras on 1300 888 803.
Read more of our insights on Super:
- Boost Your Super For The Lifestyle You’ve Always Wanted
- How your super assets add value to your retirement
Sources:
1. Investopedia: Economic Indicators
2. Westpac: Personal Banking – The Share Market- All Ords
4. Superguide: Boost your Superannuation – Unlisted investments- Super Funds Performance
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