The way forward when the markets appear to be a wrecking ball Vanguard Australia strategist Robin Bowerman tells who sailed through a bumpy 2020 – so you’re prepared for the next crisis.
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nyone with a healthy superannuation balance heading into retirement in February 2020 would have felt relatively confident they were both mentally and financially ready for the next chapter in life. But fast forward a few weeks and that confidence might have been shaken somewhat as financial markets quickly dipped into negative territory. Few forecasters could have foreseen the rapid market decline caused by COVID-19, leaving most investors with significantly diminished investment portfolios. And without a regular pay cheque contributing to their portfolios and supplementing these losses, retirees were most at risk. But was that really the case? We are very fond of reminding our investors to stay the course, particularly during a market downturn. And for good reason. While staying the course might sound like doing nothing to many, that actually isn’t the case. On a practical level, staying the course means sticking to the investment plan you put in place pre-retirement, and periodically re-evaluating your asset allocation to ensure it is aligned to your goals, time horizon and risk appetite. And while past performance is no guarantee of future results, hindsight has time and again taught us that those who moved to cash immediately after the March 2020 market crash subsequently missed the rebound a month later. Investors might have experienced relief at having exited the market’s volatile swings but that temporary emotional reprieve would have locked in those paper losses and then barred the investor’s portfolio from experiencing the ensuing market recovery, forfeiting the opportunity for portfolio values to be restored. At the time of writing, the ASX has well and truly recovered from last year’s low and is breaking alltime records. But rather than resting on laurels and assuming that everything is back to normal, now is the time for retirees (or those about to enter retirement) to think about the risks they now face, and seek out strategies to mitigate them. 14
Market risk As a retiree without a regular income to help make up for capital losses, market volatility undoubtedly delivers a heavier punch. This is where rethinking discretionary spending could help. While it isn’t an ideal solution, in a situation where you can control neither the market nor what it returns, your spending is an aspect that you can control. Reducing your spending slightly in step with your reduced portfolio balance might ease financial stress and help you navigate through the crisis. Once markets settle, then spending plans can be revisited.
Inflation risk With the prospect of rising interest rates on the horizon, inflation is quite a hot topic, but inflation risk is nothing new. Assuming that the cost of living increases by 3 per cent year on year for the next 30 years, your expenses will double in that time frame. As such, planning for inflation as part of your investment strategy and using ‘real returns’ rather than ‘nominal returns’ when looking at investment returns is key.
Longevity risk As medical advancements and technology improves, so has our quality of life and life expectancy. The average Australian can now expect to live at least to their mid-80s. Dexter Kruger was Australia’s oldest person until he died in July aged 111. Knowing this, factor in that if you retire at 67, your retirement savings may need to last you a minimum of 16 years and possibly up to 30 years and more. If you’re retiring before you turn 67, you’ll need to adjust your time horizon accordingly. Also, you should plan for the possibility of health issues as you age, and direct discretionary expenses previously allocated to hobbies and travelling towards healthcare expenses.
Emotional risk As mentioned earlier, the best course of action during periods of market volatility is to tune out the noise of everyday headlines and stay the course. If the March 2020 volatility was too much for you to bear, perhaps
YourLifeChoices Retirement Affordability Index™ August 2021
