Jonathan Philpot
The long-held 60/40 asset allocation rule is no longer adequate if Australians are to retire comfortably, with an 80/20 ratio of risky vs secure assets far more appropriate in the current market environment, according to HLB Mann Judd Sydney wealth management partner, Jonathan Philpot.
The traditional balanced investor profile previously meant a fairly equal allocation between more secure fixed interest and cash investments and riskier Australian, international shares and property investments. However, with the ultra-low interest rate environment set to continue for some time yet, the secure part of the portfolio could only return about two per cent over the next 10 years.
“With interest rates having been on a downhill run for the last 30 years, the balanced profile is now reflecting an allocation of about 70 per cent risky investments and 30 per cent secure investments. This is the default super option for many industry and retail superannuation funds.
“Worryingly, some super funds are classifying higher-risk corporate debt and property type investments as part of their secure or defensive part of the portfolio. This not only exposes investors to greater risk than they perhaps thought they were taking, but also shows the importance of comparing like-for-like funds on performance tables,” he said.
Mr Philpot said while the US sharemarket in particular has benefitted from the huge tech sector gains of the past ten years – returning an average of 13.68 per cent – the next 10 years will not be able to generate anywhere near that type of return, given the current high valuations. Excluding the US, global returns over the past decade have been 6.17 per cent, with this projected to be 5-6 per cent in the coming ten years.
“Many retirees wish to preserve their capital throughout retirement which requires a 5 per cent plus return from super – this indicates you may need to be 100 per cent invested in the share market to achieve this.
“However, what if another unexpected global event takes place, upsetting our economic recovery and shares plummet 30 per cent? This is what is called sequencing risk and if you were to sell down your share position, as you would be strongly considering, then you now lock in this loss that your portfolio will never recover from, and not only is your goal of preserving capital throughout your retirement gone, but most likely you will run out of money in your retirement years,” he said.
Mr Philpot said for retirees, it’s therefore critical to carefully consider their risk vs return profile. 20 per cent of their portfolio should be in a secure, four-year bucket of future pension payments at 5 per cent per annum, which should be sufficient to provide liquidity in the event there’s a significant pull back in share markets, without needing to sell shares at the worst time.
“Knowing that you have future pension payments already locked away and thus reducing the anxiety that comes with share market falls – is just as important as the reduction in sequencing risk.
“For the retirees who can’t sleep at night with share market volatility, and have no exposure to the share market, unfortunately they will continue in a low return environment that will see pensions reduce their capital balance each year,” said Mr Philpot.
