A goldilocks approach to investment risk, where your portfolio is neither too hot nor too cold, becomes more important the closer you get to retirement.
Take too much risk, and you could blow up your portfolio and experience lean years rather than golden years in retirement.
Conversely, by avoiding risk you may fail to generate the wherewithal to sustain your lifestyle during your later years.
“You can lock in a term deposit or fixed income investments, but if you’re a retiree with 25 years to live, if you go too conservative, you’re not going to get a nice outcome,” says Fidelity International’s Richard Dinham.
And the current market environment, where interest rates are at historic lows and real investment returns – when factoring in inflation – are hovering below 1 per cent. Inflation is now running at around 1.6 per cent and annual GDP growth is below 1.4 per cent.
There’s also rising speculation that central banks could cut rates again in 2020.
With interest rates falling, the return from cash-based investments alone could be expected to also be lower. People can be locking in negative or very low real rates of return if relying too heavily on cash, says Dinham.
“You need a diversified form of risk – including equity risk and credit risk – to smooth your outcomes. Equities inevitably dominates here, but it’s taking the right amount of risk is vital.”
Back to basics A large part of the problem for those nearing retirement, or already retired, is the concept of sequencing risk. Dinham refers to this as a core concept, “a 101 of financial planning” for retirees.
This refers to the risk that market volatility will erode an individual’s superannuation balance, particularly around retirement when these amounts are at their highest.
Compounding is a key element here – again, something that is generally well understood when we think about earning income and investing, but not so much in the context of retirement.
For example, let’s say you invest $100 in shares, and the share market declines by 10 per cent in the first year, and then increases by 10 per cent in the second year. After the first year, the investment of $100 is only worth $90. At the end of the second year, that $90 in turn only grows to $99 – an overall loss of 1 per cent, or 0.5 per cent a year.
For the total amount to return to $100 again, the portfolio must return 11 per cent in the second year, not 10 per cent. The size of the returns must be large enough to offset the earlier losses.
Recovering after market losses
Source: Fidelity International
Though markets will generally recover at some point, the losses may be permanent for investors who don’t have the benefit of time to wait for this.
“It’s about finding a way of minimising the impact of markets while still remaining invested in them.”
A bucket approach to asset allocation is one commonly used method. The premise is that assets needed to fund near-term living expenses should remain in cash, as explained by Morningstar’s Christine Benz.
Assets that won’t be needed for several years or more can be parked in a diversified pool of long-term holdings, with the cash buffer enabling you to ride out periodic downturns in the long-term portfolio.
Benz recommends cash allocations should be tailored depending on your life-stage. In general, people still earning an income require less cash than those who are retired and drawing from their portfolio.
The right amount of cash also depends on your investment approach. If you’re an opportunistic investor, you may want more cash on hand to put into the market during a dip.
It’s also worth shopping around for the most attractive term deposit or other cash vehicle.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
