The Covid-19 lockdown has opened our eyes the importance of small business. Aussies have rallied around their local cafes by buying takeaway meals, keeping their gym memberships open or foregoing refunds for accommodation at their favourite holiday hotspot.
The penny has dropped. We’re all connected and Aussies are rooting for small business.
But many of us may not realise that we are part owners in some of the largest businesses and brand names in the world through our superannuation or managed funds.
Let’s talk about the diversified option
What happens after you have clicked ‘diversified’ on your super application and your employer transfers 9.5% of your pay to the fund?
Since diversified funds typically hold a mix of Australian and international shares, government bonds, infrastructure, commodities and property, that means your fund may be holding tech blue chips, be invested in an airport, a toll road, a barrel of oil or rolls of toilet paper.
They might have exposure to the banks, the big supermarket chains in Australia or healthcare providers who serve an ageing population. The fund may have a stake in the digital cloud or government bonds. In short, they are diversified.
Whether it is tech, tolls or toilet paper, your fund takes a clip of the profits.
But what does this mean for me?
Simple. Every time you pay your entertainment subscription, log into social media, fill up at the petrol station, pay interest on a loan or throw coins in an airport parking station – you may be benefitting.
Sure, it’s a long and winding road to get to your account, but not as long as you think. Big companies have more to do with your bottom line than you realise. In fact, the markets tend to average a much higher return over the long term than cash.
So, while the pennies are dropping about our small business eco-system, it’s worth considering that it is larger than your local café or gym.
How does it work?
Many people might think that the only benefit of buying a company is to buy low and sell high. But big companies with strong growth prospects do so much more.
For one, they employ large numbers of people and employment means spending. Add to that those who indirectly rely on a growing company, such as truck drivers, parts suppliers, or marketing companies, and you can see that growth can mean prosperity for many.
Second, they make profits. These can be paid out as a cash dividend, or be reinvested to get your compounding journey started early. Companies can also retain some profit to expand their product lines and generate new sales in new markets. Or acquire other companies within already established markets.
Some of them might even pay tax.
Getting the company flywheel moving can bring prosperity to communities and often that penny only drops when a manufacturing plant is closed down.
Be careful cashing in too soon
At a time when markets around the world are sending investors on a bumpy ride, it can be tempting to cash in the managed funds in the name of safety or see the government’s $20,000 offer to withdraw super as a sweet deal.
On the flip side, your super fund may be picking up these companies at a discount (what we call dollar cost averaging), giving you more units to enjoy when the recovery comes.
If you think that some of the leading household names in banks, supermarkets and technology are here to stay – then perhaps you should stick around too.
What goes around comes around.