Income-oriented investors in or nearing retirement should look beyond traditional asset allocation to manage risk, according to a new white paper from BetaShares.
The current low-growth environment coupled with market volatility has made bonds unattractive and standard equity asset allocation strategies risky, said BetaShares’ chief economist David Bassanese.
“The trade-off between investing safely and preserving one’s investment nest-egg versus taking on more risk in the search for higher returns is becoming much more acute. New challenges require new approaches,” he said.
Mr Bassanese warned that investors who are nearing drawdown run the risk of spending their investment capital to finance the cost of living.
“This prospect is a growing reality for Australians, due to rising life expectancy and lower returns on safer assets than in previous years. Cash, bonds and other defensive assets are delivering low returns,” Mr Bassanese said.
He also warned that through sequencing risk, volatile markets threaten to cause problems for those entering retirement.
“Volatility need not be a large concern for long-term investors who don’t need to access their retirement savings for several years, but for those in or approaching retirement this volatility matters greatly as it leaves them vulnerable to hard-to-recover-from equity market slumps early in their retirement,” Mr Bassanese said.
While a traditional asset allocation offered a good level of downside portfolio protection in the event of a market decline, Mr Bassanese cautioned that upside returns when the market rises would be “forgone” to a similar level.
He suggested that investors consider managed risk equity strategies to seek better returns than those of traditional asset allocation strategies, while also limiting the potential for downside losses.