History tells retirees to protect equities – 10 major market falls in 27 years

From

Denis Donohue

No one can predict the stock market, but history shows risk can and does erode retiree capital. Be they called “corrections, downturns or crashes”, the impact on capital can be significant.

Brisbane-based Pentalpha Investment Management Limited has studied the number and severity of drawdowns of the S&P/ASX 200 Accumulation Index over the last three decades.

There were 10 occasions when stocks fell more than 10 per cent in market value, the worst being the Global Financial Crisis -50.58 per cent. The peak to trough duration of that drawdown was more than 16 months (339 trading days). However, more alarmingly for retirees, it took 1482 trading days (or nearly 6 years) for the market to recover to its prior peak. There have been three other such episodes where recovery has taken multiple years, investment horizons that retirees cannot generally afford.

 

Duration of Drawdown – is the number of days of decline from market peak to market trough
Duration to Prior Peak – is the number of days to recover to the level of the prior market peak, through the downdraft of the drawdown and eventual recovery.

 

“We are not saying Australian equities are too dangerous for retired people, quite the contrary. Retirees need both the growth elements of Australian equities to keep up with inflation, but also the rich, tax-friendly yields (or dividends) they offer to supplement the depressed yields from their other defensive assets which are at historic lows.

“However, with equity markets having recently been at all-time highs and increased uncertainty around the world, it is prudent to consider protecting investors’ share market capital and we do this with insurance.

“Interest in our protected dividend income strategy is growing. The advice sector and even unadvised SMSF trustees have started to question how much longer this run on the ASX will continue. Sharp market reversals are a fact of history and they do affect retirement incomes. Retirees, foundations & self-managed funds should ask themselves how they can protect capital,” said Denis Donohue, Executive Chairman at Pentalpha.

By Denis Donohue, Executive Chairman and Head of Investments

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