The investment portfolios of retirees are not sufficient to deal with the likelihood of a downturn in the investment market and should incorporate a crash protection strategy, according to a boutique asset manager.
Wheelhouse Partners managing director Alastair MacLeod said moving into retirement introduced risks in investing that were not present when people were working and investment objectives needed to pivot as part of that shift.
“Most investment strategies are designed for people in the accumulation phase, but those entering retirement need to reassess their investment approach to make sure it still suits their needs,” MacLeod said.
He pointed out many retirees increase their allocation to cash to reduce the impact of a downturn, but it was also the lowest-returning asset and “in the current environment, with returns from cash so low and interest rates predicted to fall further, retiree investors need to consider other options”.
A crash protection strategy using derivatives or ‘put’ options could limit losses to 50 per cent or 60 per cent of the market’s fall in a correction, yet would only cost an investor 1 per cent to 2 per cent over the course of a year.
“Crash protection is like having little sleeping securities; always there and ready to wake during times of crisis when investors need them,” MacLeod said.
“It means that investors can remain fully invested in order to make the most of equity returns, but at the same time ensure a valuable layer of capital protection.”
Crash protection could be likened to insurance in that it was bought for a limited period, was attached to a certain notional value and was cheaper if an investor wore the first few per cent of any decline, but had the advantage of allowing the rest of the portfolio to remain fully invested in equity returns, he noted.
He added the strategy was not a quick-fix solution and needs to be actively managed in order to maximise its effectiveness.
“Any worthwhile crash protection strategy needs to be tailored to the underlying portfolio exposures and match the risks present. If the strategy hasn’t been designed properly, it will not only be more expensive, but it may not provide the desired protection,” he said.