It is not often I find myself reading about investment risk and thinking “this is really interesting” but it happened this morning on the train.
Paul Resnik Co-Founder of investment risk profiling company Finametrica, has written a thought provoking piece that challenges a long held belief in the investment arena that clients portfolios should be de-risked as they get older, reducing exposure to equities over time.
According to their research, over the last 40 years investors would have been better off in retirement if they had maintained higher equity exposure in their retirement portfolio, except in 5% of cases where there is no difference.
This is centred around the theory of sequencing risk, which is the risk of early losses or poor returns doing irreparable damage to retirement investment outcomes.
This is particularly relevant at the moment with the recent fluctuations in global stock markets where your might be tempted to reduce your exposure to investment risk.
Finmetrica’s research suggests that this is not the case and in fact where you are taking a “reasonable” income from your portfolio you should participate more fully in equity markets and not reduce your investment risk.
This is a view that we have considered for some time now and would generally agree that equity markets in retirement are more likely to help clients achieve their desired outcomes.
The conclusions around sequencing risk are a really interesting addition to that thinking.
At the end of the day you still have to have the right investment portfolio, but I guess thats where we come in.
What do you think about investment risk?
There will be a second part to this post where we challenge some of the widely held views about alternative investment markets.
This is not intended as advice and should not be treated as such.