Data from SuperRatings shows superannuation funds with higher exposure to growth assets – between 66 and 78 per cent – didn’t see higher returns over five and ten year periods, Milliman head of fund advisory services Michael Armitage said.
“Investors know that growth assets such as shares and property typically deliver strong long-term returns. What they don’t know is that the long-term may be much longer than they’re prepared for and the risks on the journey far greater than imagined,” Mr Armitage cautioned.
Additionally, Mr Armitage commented that “while there is a strong correlation between risk and return, there are often long periods of time when investors aren’t rewarded for taking on greater risk”.
Evidence of this can be seen in many emerging markets, where periods of strong economic growth haven’t always translated in to gains in equity markets, Mr Armitage said, noting that the MSCI Emerging Markets Index gained only 3.54 per cent a year in the decade up to 30 June 2016, with greater risk and volatility than most developed markets.
Mr Armitage said “such episodes of long-term underperformance are cause for concern”, as very few investors hold investments longer than a decade outside of their superannuation fund.
“Around one-quarter of Australians surveyed by [ASIC]'s Australian Financial Attitudes and Behaviour Tracker said they held 15- to 20-year financial plans,” he said.
“A more troubling finding was that the proportion of those long-term investors who said they ‘had kept an investing rule or strategy they’d set’ fell to 42 per cent – down from 57 per cent just 18 months earlier.”
Investors should look to adopt some of the more sophisticated techniques used in the institutional sector to manage risk, Mr Armitage said, explaining that “growth assets play too important a role in investors’ portfolios to leave the outcome to a ‘long-term’ which may never arrive”.
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