Time, a silver bullet?

The new Defined Contribution (DC) system with individual pots holds greater investment risk for participants. Although lifecycle investing is designed to reduce risk with age, the transition still requires careful management.

The widely held notion that time is a silver bullet for investment risk also warrants closer examination. While longer investment horizons generally increase the likelihood of recovering from market downturns, a full recovery is not always guaranteed. This raises a key question - how much risk are younger participants bearing and is this fully understood?

Research on long-term investing challenges the idea of declining investment risks over time. It is commonly found that longer horizons reduce uncertainty around average annual returns, but this is not the full picture. The sequence of the returns can have a meaningful impact on accumulated savings at retirement. For a 30-year retirement savings horizon, returns during the first 15 years may explain 6% of final wealth accumulation while returns during the last 15 years may as much as explain 65% [1] (the balance made up of actual contributions). This means that below average returns late in a working career could overshadow higher returns achieved earlier.

Lees dit artikel verder onder Download.