It’s been nearly a year since the world changed as COVID-19 took hold. Of all that has been written
about and said so far, the word ‘uncertain’ seems to be the most enduring.
Uncertainty is not many people’s preferred state, but for retirees in particular, it’s even more
concerning, coming at a time when the juggle and stress of raising kids and building careers should be a
warm but more distant memory.
We spend 40+ years working to build an asset base to support us in retirement and we need that asset
base to deliver three key outcomes:
• Income generation – but not at the expense of capital loss,
• growth – of outcomes, and
• certainty – of outcomes…
…and do all this for an unknown number of years.
So how has the COVID-19 pandemic impacted these three retirement needs?
While stock markets globally have largely recovered since March, the underlying economy and outlook
for businesses hasn’t. This means dividends have been cut or reduced by many companies – impacting
income. Meanwhile, other asset classes such as Fixed Interest, Bonds, and Property are also delivering
substantially less returns.
Ranjit Das, Principal at Rahali Corporation believes this is a significant problem because of the over
reliance on income since the GFC. “Even over 10 years, traditional income sources like Banks, Telstra
have underperformed the ASX200, so non-traditional income sources are essential in client portfolios,”
At the same time, there has been a lot of volatility – a direct outcome of uncertainty – across asset
classes and currencies. This means it’s hard to predict when is a good time to either sell assets if
required or buy back into them.
“Retirees are very nervous in nature as they have no means to rebuild lost wealth. Any sharp spikes to
the downside creates a fear that capital will erode, income will reduce and they will ‘run out of money’.
Any sharp upticks don’t provide any joy as retirees are ‘buy and hold’ – much more than younger clients
who may be tempted to buy/sell and rejig allocations,” said Das.
In addition, the recovery of many markets at an index level has been driven by a few – namely
technology and consumer discretionary stocks – that have skewed the index. This means that those
following the index have a greater risk by being less diversified. If you’re starting out or still in the
accumulation phase of investing this might be ok, but not for retirees as they have additional risks
• Sequencing – incurring large losses early in retirement, endangering a comfortable retirement
• Longevity – ensuring your investments are there to support you for the full journey; and
• Inflation – ensuring the purchasing power of your investments doesn’t erode.
The culmination of COVID-19 uncertainty, loss of business, and government stimulus that is currently at
play is creating all three of these.
There are solutions however that are genuinely uncorrelated sources of income – from shadow banking
to catastrophe insurance to selling equity insurance. However, the first two are very difficult to access as
a private investor, whereas equity insurance is more accessible and easily available.
So what is it?
In a nutshell equity insurance is really a metaphor for selling put options to enter stock positions that
you want to own rather than buying them directly. This then generates a premium which is treated as
income for the investor, regardless of whether the stock is ultimately bought or not. As a result, the
• More consistent income;
• A diversified source of return;
• A downside buffer to first loss; and
• Reduces portfolio volatility.
This means that in periods such as now, investors have somewhere else to go for income. Further, as
option premium increases with volatility, an uncertain environment in most cases increases income
from this source.
Helping to create more certainty in an uncertain world.