Investing against poverty in retirement

One of the most popular superannuation investment strategies is badly flawed according to a Griffith University finance expert.

Griffith University Professor of Finance Michael Drew says recent research shows ‘lifecycle investing’, popular in Australia, the United States and the United Kingdom, can potentially leave investors worse off in retirement than alternative strategies.

“Lifecycle investing tends to be the default model adopted by many superannuation and pension funds in the United States, the United Kingdom and is increasingly gaining popularity in Australia,” Professor Drew said.

“The model works on the principle of adopting high risk strategies younger in life, then working towards the reverse closer towards retirement. The investments are put on autopilot, changing gears driven by age, with the promise of gliding in softly to land at retirement.”

However, this model doesn’t take into account external factors, such as the current market downturn.

Professor Drew and a colleague, Dr Anup Basu from the Queensland University of Technology have challenged this approach based on thorough research.

“We challenged the lifecycle investing approach based on more than 100 years’ worth of financial returns data and found it to be potentially very risky in terms of failing to meet the retirement saving goals of many investors,” Professor Drew said.

“Selling when the market is low as it has been this year just because you’ve turned 45 years old doesn’t make sense.”

Professor Drew and Dr Basu are currently developing an outcome driven approach of managing retirement savings to be released in 2009.

“Even in the current climate it’s vital to have a robust investment approach that is focussed achieving your retirement saving goals,” Professor Drew said.

“Now is the time not to be taking risk off the table – that’s highly short-sighted. The current climate has been described as the greatest correction since the depression, which signifies great opportunity.”

Professor Drew and Dr Basu’s findings from their paper, ‘Portfolio Size and Lifecycle Asset Allocation in Pension Funds’, will be published in the Journal of Portfolio Management Summer 2009 edition.