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Baby boomers back equities to boost retirement savings

Baby boomers back equities to boost retirement savings

New research is showing gender and age are driving investment diversification in retirement savings.

Global market volatility is driving some of Australia's 'baby boomer' investors to cut their equity portfolios, but they may risk missing out on any upturn.

Low investor confidence in equities, coupled with volatile markets and political uncertainty, continues to impact on investor behaviour, the August 2016 CFSGAM Investor Insights report shows.

There's also a clear distinction between the investment decisions of younger and older non-advised investors.

Overall the CFSGAM / University of Western Australia (UWA) Equity Preference Index (EPI) fell 3% in the second half of 2015, compared with a decline of 9% in the 2015 first half.

Since the 2007-08 global financial crisis (GFC), older ‘boomers’ (born between 1946 and 1955) have reacted more than younger ‘boomers’ (born between 1956 and 1964) to market volatility.

They reduce their allocation to growth assets in a downturn, but return to equities as markets recover, the report says.

May lock in losses

While this might reduce their vulnerability to capital losses close to retirement, they may also lock in their losses and are likely to miss some of the gains in the recovery when their portfolio is less exposed to equities.

The author of the report, CFSGAM Economic and Market Research analyst Carlos Cacho, said that this reaction to volatility was also observed in other Colonial First State data, which was showing a recent pick-up in equity allocations by older boomers.

"One potential explanation for this recent re-allocation to equities is the thought of retirement. As boomers get closer to retirement and realise they may not have sufficient savings for a comfortable retirement, they may look to increase their exposure to growth assets as a way of trying to make up this shortfall.

"This [trend] has likely been exacerbated by further declines in the cash rate and bond yields over recent years."

Retirement lifestyle aims

The Association of Superannuation Funds Australia (ASFA) estimates that for a comfortable retirement, the average Australian would need $545,000 in superannuation savings or $640,000 for a couple.

While the change in investor sentiment towards equities was milder than in previous periods of volatility, Cacho said this could be a reflection of the already low allocations towards equities and other growth assets.

“When considering the level of investor sentiment towards equities compared to history, it may just be that they cannot decline much further without negatively impacting an investor’s ability to accumulate superannuation.”

The Investor Insights report analyses data from the EPI - a proprietary measure of investor sentiment by age and gender developed by CFSGAM and UWA Business School, which is calculated using Colonial First State managed fund flow data for non-advised investors.

Market reaction by gender

The research shows that women under 35 have a higher preference for equities than men, but in all other age groups, women consistently have a lower exposure and preference for stocks.

"This continues to place women at a disadvantage when saving for retirement given on average women live longer, retire earlier, earn less and are more likely to take time out of the workforce to raise children or care for relatives and to work part-time than men," the report says.

Over the second half of the year, women over 59 increased their equity allocation in super accounts by 6%, compared with a 3% increase by men in the same age group.

Increasing their equity preference at a faster pace later in life could suggest that women are taking action to better align their current allocations to their retirement goals, the report says.

International diversification

As the Australian economy continues to transition from the mining sector, investors appear to be considering international equities for exposure to sectors not prominent in Australian equity markets.

The research found under 35s increased their allocation to domestic equities in 2015, but all other age groups continued to show an increasing preference for international equities.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Product Disclosure Statements (PDS) and Information Memoranda (IM) for the funds issued by Colonial First State Investments Limited ABN 98 002 348 352 AFSL 232468 and Colonial First State Managed Infrastructure Limited ABN 13 006 464 428 AFSL 240550 (collectively CFS) are available from Colonial First State Global Asset Management. Investors should consider the relevant PDS or IM before making an investment decision. The Commonwealth Bank of Australia (Bank) and its subsidiaries do not guarantee the performance of the fund or the repayment of capital by the fund. Investments in the fund are not deposits or other liabilities of the Bank or its subsidiaries, and investment-type products are subject to investment risk including loss of income and capital invested. Colonial First State Global Asset Management is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124.