Fear and panic can potentially cause harm when market downturns are reported. During these times individuals may switch their super to a more conservative investment option, which provides lower returns.
Investment through superfunds is long-term and what we should be aware of is that market downturns happen, and that these downturns are usually corrected over time.
Our research shows that even in the global financial crisis (2007-2008), the most aggressive investment options, on average, take 10 years to recover losses. For long-term investments, it can pay off to take more risk, as it will add to the long-term return and build a healthy retirement balance.
The main conclusion we support from our research is that higher exposure to growth assets can significantly increase the expected level of income in retirement.
With most working people falling into the superannuation category of a defined contribution, our retirement balance is largely dependent on the investment options we chose in the accumulation phase.
Research indicates that approximately 75-80% of Australians do not actively choose their super investments, consequently they fall into a default option, often called ‘balanced’.
The view of higher risk, higher return in finance implies that a young person with a long investment profile should hold an aggressive portfolio rather than a defensive portfolio if he/she wants to achieve maximum returns over the longer term. This is supported by our analysis of the long-term return of the Australian Superfund returns for a period of 27 years where we show that the returns in the aggressive options over the long term are higher than the returns in the conservative (and balanced) options.
Hence the right investment choice at the start of your working life is very important.
It is my opinion that superannuation fund members should be taking more risk, as the long investment horizon gives more than enough time to recover from market downturns. It should be noted though that this should be an informed decision based on individual risk profiles and preferences.
Increasing life expectancy is also an issue here. The average life expectancy of Australians is 83.50 in 2020, which means that retirement can last 20 years or more. Hence, strategies to maximise super balances at pre-retirement are important, as Australians may be relying on their super for income, for longer periods of time.
The idea of de-risking, that is, as we grow older we should move to a more conservative investment strategy, needs to be carefully thought through. Academic research indicates that an important consideration at the point of de-risking is to consider the amount of accumulated wealth. While individuals should consider their own risk preferences and profiles, our results indicate that completely canceling bold investment strategies at this point in one’s life, may not necessarily be the best option.
It is important to not apply a blanket approach close to retirement age and, obviously, it is important to choose the right investment options that suit your individual circumstances.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Please speak with a financial advisor before making investment decisions”.
Banita Bissoondoyal-Bheenick - School of Economics, Finance and Marketing
