The Importance of a Higher Equity Allocation
1. Maximising Long-Term Growth Potential
For investors with a long investment timeframe, time is their greatest asset in building wealth. Investing in a higher equity allocation can lead to significant growth over time. Equities tend to outperform other asset classes, such as bonds or cash, over the long term. While shares can be more volatile in the short term, investors with a long horizon have the advantage of riding out market fluctuations and benefiting from the higher potential returns that equities offer.
2. The Power of Compounding Returns
Compounding returns enable investors to earn returns not only on their initial investment but also on the returns they’ve already made. The longer the investment period, the more time the money has to grow. A higher allocation to shares, which historically yield higher returns, will allow savings to compound more effectively over time. By reinvesting returns, investors can take advantage of exponential growth, significantly increasing their investment balance by the time they reach their financial goals.
3. Time to Recover from Market Volatility
Markets can be unpredictable, experiencing downturns followed by recoveries. However, investors with a long investment horizon have the luxury of time to recover from these downturns. By maintaining a higher equity allocation, they can stay invested through market cycles and capitalise on eventual recoveries. Over decades, the impact of market fluctuations diminishes, and the overall trend of equity markets remains positive. Regular contributions during market dips also allow investors to purchase shares at lower prices, further enhancing long-term growth.
4. Regular Contributions Accelerate Growth
Regular contributions to investments allow for dollar-cost averaging. This strategy involves consistently contributing the same amount, regardless of market conditions. When markets are down, investors buy more shares at lower prices, and when markets rise, the value of existing shares increases. A higher equity allocation enhances this effect, as shares in growth assets tend to provide more significant long-term gains compared to conservative assets.
5. Reducing Risk Over Time
As investors approach retirement, it’s generally recommended to gradually reduce exposure to equities to protect savings from short-term volatility. However, for those with a long investment timeframe, taking on more risk through a higher equity allocation can significantly enhance growth potential. This strategy allows for maximising growth in the early years, with the opportunity to shift to a more conservative approach as the investment horizon shortens.
Conclusion
For long-term investors who regularly contribute to their investment accounts, a higher equity allocation is crucial for maximising long-term returns. By harnessing the power of compounding returns and dollar-cost averaging, along with the benefits of long-term market growth, investors can set themselves up for a more financially secure future
To see how a higher equity allocation can shift your investment balance, please reach out to us today and start optimising your retirement plan! Start with one of our quizzes below, or book in a time to speak with us.
Compound Wealth are a KiwiSaver, Retirement and Private Wealth Financial Advice Firm based in Mount Maunganui, Bay of Plenty with clients all over New Zealand.