Equity risk in retirement

Spinning the chocolate wheel in retirement

Equity investing in retirement is like spinning a chocolate wheel, there are plenty of winners, but also losers. Even a 20-year period does not ensure that taking equity risk will be adequately rewarded and this is important for retirees to understand. 

Long term equity risk premiums (ERP) in Australia are far less predictable than currently thought according to new research from Drew, Walk & Co. The research report shows that equity return (out)performance over government bonds is volatile, and its timing and magnitude, unpredictable.

Conventional wisdom suggests that the share market will always beat government bonds over the long term. But this actually isn't the case.

It's important for investors to be aware of equity risk, but also recognise that equity investments can play an important role in investor portfolios to add diversification and growth.

Key points from the report

The ERP report concludes that:

  • equity return (out)performance is uncertain. Its timing and magnitude are unpredictable.
  • forward-looking ERP in Australia for the next 20 years is lower than the historical average equity return (out)performance and is estimated to be around 3.0-4.5% a year, but this is far from certain.
  • research from the Morningstar DMS database shows the volatility of equity returns. If you were invested in the Australian share market from 1960-1980, the average outperformance over government bonds was 8.3% a year. If you were invested in the next 20-year period: 1980-2000, the average outperformance over bonds was minus 0.6% a year.
  • Australia was one of the best performing share markets historically, but performance has been in line with other markets since 1950. This is because Australia was an emerging market in 1900 when this data series starts. It is axiomatic that an economy can only emerge once.

See our research reports below for more information: