With returns declining, does your retirement investment portfolio need a shake-up?

20 October 2021

If you have received personal advice from a financial adviser, it’s most likely you would have received some investment advice including the asset allocation of your investment portfolio.

Choosing where to invest your money is a difficult decision and there are many factors that are considered when financial advice is being provided such as your:

• Overall investment objectives.

• Risk tolerance and profile.

• Expectations of returns.

• Investment timeframe.

But with declining returns potentially affecting the future value of your investments, is it reasonable to expect you will still be able to achieve your goals by investing in the same asset allocation?

Most people will be familiar with the adverse relationship between risk and returns. Generally speaking, the risk-return trade-off states that potential returns rise with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns.

However, you may also be aware that over the last few decades, the risk and return trade-off has been generally shifting in an unpreferable direction for investors.

To generate the same return now, a higher exposure to growth assets is required than it was before. According to the modelling presented by Callan Institute in the US earlier this year, to earn an expected 5% of real return 30 years ago, investors need to have 25% of growth assets in their investment portfolio. To generate the same return now, investors may need to expose 97% of their portfolio to growth assets and the risk level is nearly 3 times higher.

The medium-term return potential for a diversified growth portfolio are observed by AMP Capital in the graph below.

The trend of declining returns and increasing risk has become more evident in recent times. Interest rates from cash and fixed interest assets are extremely low while volatility in shares and property markets are extremely high – partly due to the uncertainty surrounding the fallout of COVID on global markets. Should the trend continue, lower returns means that to achieve a target amount of wealth, investors may need to either invest for a longer period of time or take on higher risk to invest more in growth assets. This may affect long term plans such as retirement projections or calculation for insurance needs.

Morning Star has the forecast summary below.

While it’s impossible to predict market movements or exactly what the next few years will hold, retirees and pre-retirees should review their investment objectives and financial goals with their adviser. They will be able to work with you to help determine if there’s any requirement for change including whether to include more growth assets in your portfolios.

For further information or advice, speak to your adviser or get in touch with the Findex Wealth Management team, who can help you develop a financial plan and investment strategy to meet your current and future goals.