A new whitepaper from investment management company Roger Montgomery has considered the question: ‘Is it time to rebalance your retirement portfolio?’
“As a tidal wave of the world’s population enters retirement, a similar-sized avalanche of investing mistakes might be occurring,” the group has warned.
“Just when retirees need their assets protected most, they are adopting unacceptable risks.”
At present, “investors are forgetting two basic tenets of investing”, the fund manager has warned – noting whenever these basics are rejected in the hope of better returns, the consequences are painful.
“The first tenet is: the higher the price you pay, the lower your return,” the whitepaper continued.
“The second is: when risk appears lowest, it is usually highest.”
For someone who is planning on retiring today – and receiving an annuity stream from investments, Roger Montgomery said, “The order of your returns will have a very significant bearing on your wealth.”
The fund manager has considered sequencing risk as “a major obstacle to a retiree realising a fully funded retirement”.
“And while almost all investors understand the impact of volatility on retirement savings, many underappreciate the greater concern called sequencing risk,” the white paper went on to warn.
Sequencing risk becomes an issue when investors start drawing down on their portfolio for the purpose of taking an income – a smaller amount of each year’s gain is retained and compounded because Australians are required to receive a minimum percentage pension payment each year from their portfolio.
“The result is that as the portfolio declines in value, a smaller payment is received,” the fund manager outlined.
While sequencing risk can create huge problems for investors, there are ways investors can mitigate such risk, with the group advocating the assistance of reputable financial planners in this instance.
This could include quarantining some funds in the early years to meet near-term lifestyle requirements, which would allow the bulk of the investment to ride through the volatility and recover.
Another option raised by Roger Montgomery is “having a fund manager that captures more of the upside than the downside” – especially for those most in danger from sequencing risk.
In conclusion, the fund manager indicated that markets can’t remain disengaged from earnings growth and the economy forever.
And with the spread between market prices and domestic fundamentals is “as wide as it has ever been”, Roger Montgomery said it is “an opportune time to reconsider an investor’s exposure to the market and consider rebalancing towards funds that might capture less of the downside”.
