‘High risk, high return’ theory for super stands up for young investors

Young people may be better off pursuing an aggressive strategy for their superannuation over the long-term, despite persistent sharemarket volatility and concerns that another global financial crisis could occur.

The findings of new research from Monash Business School help confirm the widely-employed ‘high risk, high return’ strategy – that a longer risk-return trade-off remains the best approach in the Australian context, with stronger returns from multisector aggressive and growth funds (such as equities) compared to multi-sector balanced funds over the long-term.

The research was conducted by Monash Business School researchers, Dr Emawtee (Banita) Bissoondoyal- Bheenick, Professor Robert Brooks, Deputy Dean Education, and Associate Professor Xibin Zhang, with Warren McKeown, Teaching Fellow, from the University of Melbourne.

The researchers have suggested it could take 9-10 years for risky investments to begin to recover losses incurred from a major financial event such as 2008 global financial crisis. So on average, ‘growth’ and aggressive investment options would pay off better for investors.

This applies more to younger investors than older ones, who have less time for their investments to recover.

These results provide an average view; individual choices should depend on individual risk preferences.

The researchers analysed 27 years of rolling monthly nominal returns data from Morningstar Direct to test whether younger investors should opt for a more aggressive investment strategy, rather than play it safe.

The report found:

  • The risk-return trade off held in the Australian context, with return of aggressive and growth funds better over the longer term.
  • Super returns hit by the 2008 global financial crisis tended not to recover within first five years but recovered to the long-term average over the longer term ­– meaning that investors in aggressive or growth funds could be expected to recoup short term losses over the longer term.

“The key objective is to shed some light on whether young Australian investors will be better off by investing in multisector aggressive funds rather than multisector balanced funds over the longer term,” says co-author Dr Bissoondoyal- Bheenick.

This research was funded through Monash Business School’s equity and social inclusion portfolio.

Published on 3 Oct 2017