A new research report – The (un)Predictable Equity Risk Premium – commissioned by Challenger and conducted by Drew, Walk & Co, found that since 1995, investors have only been rewarded with an additional one per cent return per year for taking on extra risk in equity markets.
Challenger chairman of retirement income Jeremy Cooper said: “Even a 20-year period does not ensure that taking equity risk will be adequately rewarded and this is important for retirees to understand.
“Conventional wisdom suggests that the share market will always beat government bonds over the long term. But this isn’t actually the case.
“Thinking about equity investing using long-term historical averages has fogged our vision about the reality of equity investments.
"You do need equities in a portfolio, but you can’t set and forget and you can’t rely on historical averages as being a sure bet,” Mr Cooper said.
Report co-author Michael Drew said the research highlights the unpredictability of equity risk premiums (ERP) – the additional return over the government bond rate – and therefore the importance of evaluating ERP in the context of core retirement income liabilities.
"What's safe and what's risky changes over your life – how you think through the various liabilities in post-retirement matters and the path that you receive returns matters," he said.
“How do [we] make sure our portfolio designs match the retirement income horizon and the sorts of risks retirees are able and willing to bare?”
Over the next 20 years, the report found that ERP will come in lower than the historical average, with average equity return outperformance to be around 3.0-4.5 per cent per year.
