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Switching out of equities raises retiree risks

Krystine Lumanta  |  09 Nov 2012Text size  Decrease  Increase  |  

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Krystine Lumanta is a journalist with InvestorDaily, a Sterling publication.


Investors are overlooking possible risks when it comes to adapting investment portfolios as they approach retirement, Wingate Asset Management has claimed.

The growing view that an investment approach skewed towards income and capital preservation was needed when investors retire could lead to poor outcomes, Wingate Asset Management chief investment officer Chad Padowitz said.

"The belief that an 'investment reset' is needed is being further entrenched and confused by an increasingly bewildering number of retirement products coming into the markets," he said.

"Pre-retirees need to ensure there are no unintended risks inherent in any new investment strategy developed as they start focusing on superannuation pension income."

Recent attention had been given to sequencing risk, which was the impact on retirement income of uneven return outcomes, Padowitz said.

"The capital risks of equity investments have been brought home to investors in recent years, especially those who are about to retire, as many have seen erosion of their superannuation," he said.

"When stockmarkets suffer large declines near or during retirement, the impact on future income because a retiree ends up with less capital to invest, can be significant.

"With Australians living longer in retirement, sequencing risk is an increasingly important issue."

On the other hand, while increasing yield investments for retirement was important, understanding all risks involved was a critical step in new strategy development, particularly those associated with any additional investments being considered, Padowitz said.

"With equities, retirees should ask themselves whether now is the right time to be selling, especially with the risk of further cuts to interest rates and the impact this has on cash returns," he said.

"Switching out of equities into very low return assets appears safe short term, but actually increases long-term risks for retirees."

Furthermore, dramatically changing investment styles could lead to a concentration of risks as many approaches relied on getting market timing right, which history has shown to be impossible, Padowitz said.

Retirees must maintain a balanced investment portfolio, which included retaining an allocation to growth assets such as equities despite their volatility, along with a way to generate income returns from the asset class, he said, adding that managing risk required a truly diversified equities exposure.