Retirees face a particular dilemma in the current investment environment of a volatile share market, low yields and interest rates. Dividends from shares are being slashed, the value of some stocks has fallen rapidly, and record low interest rates have undermined the usually reliable income stream from fixed term savings deposits.
The usual investment advice in times such as this is to hold on tight. Do not sell your investments in times of crisis because you will crystallize losses and miss out on any recovery.
According to Darren Beesley, the Head of Retirement Solutions at AMP Capital, retirees are exposed to a different set of risks than other investors.
“It is very hard for retirees to hold tight while they are watching their balances fall at record pace because it has a more direct impact,” says Mr Beesley.
“They are watching those assets and changes in markets day to day, and in some cases minute to minute, and those assets cannot easily be replaced.”
The dilemma for retirees, says Mr Beesley, is that they face two concurrent risks.
There is sequencing risk, which is all about timing. They need to draw income now to live day to day, but they are doing it at a time when their investments are falling in value, and their capital is shrinking.
Then there is behavioural risk, which is the instinct to sell out under pressure in the crisis.
“This is elevated for retirees because the assets they hold are really their livelihood,” says Mr Beesley.
“So this increases the tendency for one part of our investor base – retirees – to make that bad decision and switch out of assets at the worst possible time.”
One response, says Mr Beesley, is for retirees to re-allocate their assets into traditional defensive asset classes, such as cash and bonds.
“That may feel comfortable in the short term, but over the long term that may jeopardise the longevity of your retirement income,” he says.
“You will be locking in the lowest possible return for your retirement portfolio.”
There is no easy answer, but Mr Beesley believes a “knee jerk reaction” is to be avoided and that an option is to improve investment strategies “slowly over time”.
One way to manage the risks is to diversify, and to look for assets where prices may have been discounted. There may be value to be found in infrastructure, for example, or property.
Faced with behavioural risk, the options are to fight or to take flight, but in the case of investment it might be prudent to consider both courses of action: to remain in some carefully selected growth assets while also looking for forms of protection.
“If your money is invested in a fund which overlays a dynamic asset allocation, where someone is taking responsibility for your exposure, there may be someone looking to increase exposure to cash and reduce exposure to equities,” says Mr Beesley.
“And you will also know there may be someone ready to enter the markets when they think the signposts say the time is right to do so.”
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