David French | 2/03/2009 10:52:58 AM

This article was originally published as ‘What is good for one may not be good for everyone’ in The Morning Bulletin on 11th October 2008.

One of the least understood aspects of economics is the fallacy of composition. Imagine you’re at a football match, with Andrew Gaze sitting in front of you. You stand, to get a better view, while blocking those behind. Soon everyone is standing…and no better off. Put simply, what is good for the individual might not be good for the group. Understanding that helps you identify risks, so let’s apply it…

Contrary to the popular view, Australia is not protected from the global financial fallout. The US is spending less – much less, and the Olympics is over. As a result China is slowing. Raw material prices are beginning to fall, and as the Australian economy slows, people will pull in their belts. A $100 cut in weekly spending isn’t much for a middle income family, but across this region translates into an economic impact of more than $100 million. Financial services got hit early, but now retailers, developers and estate agents are all feeling it.

Meanwhile, some superannuation funds (notably industry funds) say their returns are enhanced by exposure to unlisted assets. These assets are not traded on organised markets and have to be sold to realise their value. Since they are not traded, no-one knows their real price, and funds capitalise on this by saying that prices have not moved, and returns remain strong. Make you feel all warm and cozy? You are in fact taking one of the biggest risks possible. On any day, an asset is only worth what you can sell it for. While one person can easily draw on their super, what if thousands of people decide to? Large illiquid assets would have to be sold – very, very difficult right now, and like many unlisted property trusts, most probably redemptions would be frozen.

No-one likes to see asset values falling - least of all a career investment professional like me. But right now, the fall in share prices has little to do with the underlying value of those shares. The price is simply showing where the market clears in a bad environment. Not pretty, but at least investors can get at some of their money when they want it. And if they hang on things will improve. Non-traded assets on the other hand, risk your money being frozen – giving you no money and no choice. This is a primary reason why I am in favour of self managed superannuation funds, where all assets are observable and at least some are liquid.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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