Many of today’s retirees have little choice but to shun the old school safety of defensive assets and embrace growth. This means they will still need to maintain a healthy allocation to assets such as international shares.
Most retirees are well aware the majority of their superannuation contributions are behind them. Thus, achieving a reasonable return on their current investments is critical. Against this, both longevity and sequencing risks present real and present dangers to their financial futures.
Until recently, cash and bond rates were generally high enough for many to expect a reasonable investment return from these asset classes. So the norm was for retirees to transition investments from growth to conservative assets.
Today, retirees are faced with a new reality. After a 30-year bull market in fixed income and extremely low interest rate policies adopted by global central banks, the risk versus return dynamic on defensive assets is decidedly negative.
Seeking pro-active growth solutions
In a world that is no longer ‘vanilla’, neither should the solutions be. Here are three ways to combat retirements big issues:
- Greater equity allocation – international equities remain one of the few asset classes that are able to generate the level of returns many retirees will require.
- Seek alternative returns to capital growth – adding additional sources of return like dividends and option premium can be worthwhile considerations. Dividends are well known as an income source but in recent times many high dividend paying companies have seen their valuations increase, in our view, to unsustainable levels. Option premiums can also present an opportunity to earn premium for agreeing to purchase shares.
- Aim to reduce volatility – the sequence of returns is critical and adopting strategies to reduce volatility can dramatically reduce overall risk returns, ensuring return are more evenly spread over the longer term.
Today’s changed investment landscape has exposed many retirees to unwanted risk. With the outlook for defensive assets declining, many have been forced to pursue increased risk to seek greater returns.
Global equity markets continue to provide a means for retirees to achieve their financial and lifestyle objectives. As result, equities should maintain a reasonable portion of a diversified investment pie.
Chad Padowitz is the Chief Investment Officer of Wingate Asset Management. Wingate Asset Management formed a joint venture with Australian Unity Investments in 2008. Through the joint venture arrangement, Australian Unity Investments provides a range of support services and financial products to some of Australia’s most astute institutions and a long established and loyal retail investor base.
