There are a number of super funds built on the concept of “life stages”.

This means that the fund is heavily invested in growth assets such as shares and property when you are in your younger age. As you get closer to retirement, the mix of investments changes, and shifts more towards low volatility and low yielding things such as cash and fixed interest funds. Hence, the fund balance changes as you go through different life stages.

- There is a superficial appeal to this approach.

- The problem is, it doesn’t stand up in practice.

The issue is that this approach implicitly assumes that returns from the various asset classes will, on average, be fairly stable over the years.

The problem is that this is often not the case – just think of how low interest rates are now, with 10 year Australian Government bonds returning less than 1%pa – yet in 1986 they returned over 16%pa. 

And average long-term returns don’t explain things.

The problem is “sequencing risk”, which shows that it is not only the RATE OF RETURN that is important, but WHEN it occurs. For example, if you have a run of high returns in the early years of low account balances, but low returns in later years of higher account balances, you will end up much worse off than the person who has low returns in  the early years, but high returns in the later years. It is all because the total amount earned is a percentage of account balance in that year.

The evidence is starting to build, thanks to the work of Professor Michael Drew from Griffith University, who has done extensive modelling comparing life stage funds with other strategies – and life stage funds come up short in many cases.