Is it time for retirees to batten down the hatches? And mitigate losses happening at the worst possible time.
Australian Investors have witnessed a 10-year bull run in Equities, and a near 30-year bull run in bonds and house values. But just as the middle Baby Boomers retire at the peak of
their wealth, headwinds are whipping up against all three of the main asset classes they’re invested in. Retirees would be wise to consider allocating a portion of their wealth to safe
harbours at this point in the retirement journey, when losses will be difficult to recoup.
How do I identify a safe harbour?
There is an eternal trade-off between risk & return. When reducing risk, a reduction in return should be expected. When approaching retirement an investor should consider whether it’s appropriate to dial down their exposure to riskier asset classes. They should also be looking to invest a portion of their wealth in asset classes which behave differently, ideally independently, to their existing investments.
Right now, we’re in an unusual period where equity, fixed income AND the family home are at historically high valuations simultaneously. Cash, in the form of bank deposits, is an
alternative to these investments – but at current interest rates inflation may gradually erode the value. Is it time to look to alternative investments which keep up with, and exceed,
Alternatives, global direct real estate and senior secured loans generally benefit in an inflationary environment. They are generally out-of-synch with equities and bonds, but it’s not guaranteed. Therefore, an option may be to invest in a fund which is specifically designed to be out-of-synch with equities and bonds, as well as capture returns which keep ahead of inflation.
1st rule of investing: don’t make losses
2nd rule of investing: see above, especially near retirement
The day of retirement is when an individual’s investments are generally at their peak. It is also when the consequences of losses are most acute. This is because large losses at this
point will be very difficult to recoup. For example, a 45-year-old who incurs large portfolio losses typically has 20 years before reaching retirement, and therefore has a long time horizon
over which to recover losses. The situation is very different when a 65-year-old incurs large losses. Such losses may undermine the quality of the retirement that was anticipated, they may delay retirement, or they may even force a retiree back to work.
Ashley O’Connor is the Head of Investment Strategy at Invesco Australia. He has a Bachelor of Commerce and was previously the Head of Debt at Frontier Advisors.
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