By Jonathon Tainsh
Recent research (1) offers a new perspective on retirement portfolio allocation, suggesting retirees might benefit from a greater emphasis on shares, challenging the traditional approach of combining shares and fixed interest.
Of course, understanding research conclusions and applying them into real-life portfolio decision making are two separate things. Let’s look at the research and how to apply it.
Shares vs. Fixed Interest: What’s the Big Deal?
Shares, or stocks, represent ownership in companies and have historically delivered higher returns compared to fixed interest investments like bonds. However, they come with more ups and downs. On the other hand, fixed interest investments are typically seen as safer but can falter during high inflation and rising interest rates.
The study looked at a massive dataset covering financial markets in 38 developed countries over nearly 2,500 years. It found that portfolios with more shares had lower failure rates for US retirees. Surprisingly, a 100% share portfolio had a lower chance of running out of money compared to a traditional mix of shares and fixed interest.
Understanding the Risks: Longevity and Sequencing
Two major risks can derail your retirement plans: longevity risk and sequencing risk. Longevity risk is simply the risk of outliving your money. Sequencing risk involves the order of your investment returns, especially crucial as you approach retirement. If the market dives just as you retire, it can have a big negative impact on your portfolio.
Modern Portfolio Theory usually suggests mixing different types of investments to balance risk and return. But this research hints that a share-heavy portfolio might actually be better in some retirement scenarios.
That said, handling the ups and downs of a 100% share portfolio can be tough. Many people panic and sell at the worst times, like during the Global Financial Crisis, which can wreck their retirement plans.
The Reality Check: Is a 100% Share Portfolio Practical?
Going all-in on shares sounds great on paper, but in practice, it’s not so simple. Here are some challenges to consider:
- Sequence of Returns Risk: Taking money out during a market slump can drastically shorten how long your portfolio lasts.
- Diversification: Relying solely on shares means missing out on the stabilising benefits of a mixed investment strategy.
- Market Changes: An all-share portfolio might struggle to adapt to rapid economic shifts.
Key Takeaways for a Balanced Approach
Even if a 100% share strategy isn’t feasible for everyone, the research offers some valuable insights:
- Long-term Growth: Shares are crucial for boosting long-term returns and beating inflation, which is key for a comfortable retirement. The right proportion of shares in your portfolio depends on your personal goals, financial situation, and how much risk you can handle.
- Global Diversification: Many Australians prefer investing in local shares, but diversifying globally can reduce risks and improve portfolio stability. Australia’s market is relatively small on the global stage, so spreading your investments internationally can be beneficial.
Balancing Risks and Rewards
This new research highlights the potential upside of a share-dominant portfolio for retirees. But it’s essential to approach these findings with caution. Past performance doesn’t guarantee future results, and each person’s risk tolerance and market conditions vary.
As financial advisers, our job is to help you navigate these choices and craft a retirement strategy that fits your unique needs and goals. Whether you lean towards shares, fixed interest, or a balanced mix, the key is to stay informed and make decisions that support your long-term financial wellbeing.
Reference
- Anarkulova, A., Cederburg, S., & O’Doherty, M. S. (2023). Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice. SSRN. Available at: https://ssrn.com/abstract=4590406
Disclaimer
People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.
