The long-term returns of asset classes are a reference point for future retirees.
Vanguard’s inaugural How Australia Retires study, released in May 2023, found that people with the highest confidence about their future retirement tend to take the most purposeful action to prepare.
That makes a lot of sense, especially on an investment level, because building up savings for retirement via superannuation, and outside of it through other investments, is typically a long-term process.
And the preparation journey doesn’t necessarily end at the point of retirement either. Because the process of investing generally needs to continue during retirement to ensure your accrued investments can keep compounding over time to support your lifestyle when you’re no longer receiving a salary.
Retiring from work shouldn’t equate to retiring from managing your investment portfolio.
Taking an active role in your investments, to ensure you have the best chance of protecting and growing your capital over time, is just as important in retirement as it is before you stop working.
Which is where the 2023 Vanguard Index Chart provides some sound perspective in terms of long-term investment growth. It shows how a range of different asset classes performed over the 30 years from 1 July 1993 to 30 June 2023 based on an initial $10,000 investment.
The dollar figures are calculated on the basis that all of the distributions over the 30 years, including interest and dividends, had been reinvested back into the same assets to maximise the effect of compounding returns. The numbers also exclude investment fees or taxes.
Asset classes perform differently from year to year, but the historical data going back for decades shows that despite inevitable short-term price dips, asset classes tend to deliver growth over the long term.
The importance of diversification
Investing across a range of asset classes helps to smooth out poorer returns from some asset classes from year to year.
Since 1993 there have only been a handful of occasions when the same asset class has been the best-performer in consecutive years. As such, chasing the last year’s returns is usually a futile exercise.
In 2018-19 Australian listed property was the best-performing asset class, returning 19.3% per cent. A year later the same segment showed a negative return of 21.3% (primarily due to the impact of COVID-19) – a reversal of 40.6%.
Asset allocation is often a complex exercise for investors, because it can be difficult to know how much to invest into different asset classes at different stages of life, including in retirement.
That mostly comes down to one’s investment risk profile (personal appetite for lower or higher-risk investments).
This is where superannuation lifecycle products that have been designed to smoothly adjust asset allocations according to an investor’s age are providing a seamless solution.
This provides members age-appropriate asset allocation adjustments and the peace of mind of automatic de-risking of their portfolio leading up to and during retirement.
For example, Vanguard Super’s lifecycle option adjusts 36 times over the course of a member’s life and harnesses the Vanguard Group’s extensive experience in lifecycle fund management and low-cost index investing.
Lifecycle members aged 47 and under are invested in a diversified portfolio with a higher allocation to growth assets. From age 48, the Lifecycle investment undergoes a series of annual changes reducing the allocation to growth assets, while increasing the allocation to defensive assets.
From age 82 onwards, the asset allocation is designed to have a greater emphasis on reduced risk to shield retirement savings from the impacts of volatility.
Other investment principles that could help in the lead up to retirement
Staying the course, and not being distracted by short-term market noise, is just as important in retirement as it is at any other time. What happens in the financial markets day to day typically has minimal impact over the long-term.
As such, it’s always important to focus on the things you can control.
This includes reviewing your spending regularly and making sure you’re invested in products that have low management costs. Afterall, the lower your investment costs the more money you get to keep.
And finally, diversify, diversify, diversify. The best approach to building an investment portfolio whether that that will help protect your retirement capital is to apportion funds across different asset types, such as shares, bonds, property and cash, as the diversification will offset the risks of being too exposed to one asset class. Don’t forget that this includes your superannuation portfolio and if you’re a home owner or own an investment property, your properties.
Source: Vanguard August 2023
Reproduced with permission of Vanguard Investments Australia Ltd
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