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At a recent portfolio construction conference the buzz word/concept was one
of lifecycle investment. The basic premise of this concept is that the portfolio you might construct for a 20 year old would be different to the one constructed for a 60 year old. Namely, that the 20 year old can afford to take more risk and so can have a higher weighting to growth assets. The 60 year old would have a higher weighting to bonds and cash.
Now there is quite a bit of research behind lifecycle investing, and the main reason it has sprung to prominence in a post GFC world is its ability to control, to some extent, sequencing risk. This is the risk posed by poor returns right at the time when you have little time to recover and also have the largest sum of money at
stake. That is, generally just before retirement. A series of negative or subdued returns right at that point in time can have a much larger impact on your overall financial position than say, when your 30.
I have no particular problem with lifecycle investing theory per se. It is an approach that professional advisers use all the
time dealing with clients at different stages of their life. The problem I believe is where product providers take a ‘planning’ concept and try to dumb it down to a ‘product’ solution.
There are already large industry Super funds who are making mandatory changes to their default investment options, where unless instructed otherwise, everyone in their default option will be transitioned to a ‘lifecycle’ product over the next 2 years. What are the problems with this? Firstly, it assumes that every one of the same age has the same needs from their portfolio. This is obviously rubbish. It also will mean moving older client’s money into bonds at a time when these assets are at historical highs around the world. So it requires the movement into assets at a time when this may not make sense. Over a 30 year timeframe this may not be an issue, but imposing a short timeframe on the
transition may create the exact circumstances they are trying to avoid (sequencing risk).
There is also the chance that in attempting to avoid sequencing risk, these products may be increasing your longevity risk. But that is a topic for another article.
These are examples of the problems that come with ‘product’. It is an unthinking mechanism blindly imposing parameters that may or may not suit the individuals affected. The simple answer to this is to get some proper advice and
get involved with your super. If you’re in the lead up to retirement and in a changing default option, this may be more important now than ever.