The long-held 60/40 asset allocation rule is no longer adequate if Australians are to retire comfortably, with an 80/20 ratio of risky vs secure assets far more appropriate in the current market environment.
The traditional balanced investor profile previously meant a fairly equal allocation between more secure fixed interest and cash investments, and riskier Australian, international shares and property investments. However, with the ultra-low interest rate environment set to continue for some time yet, the secure part of the portfolio could only return about two per cent over the next 10 years.
The balanced profile is now reflecting an allocation of about 70 per cent risky investments and 30 per cent secure investments. This is the default super option for many industry and retail superannuation funds, however some super funds are classifying higher-risk corporate debt and property-type investments as part of their secure or defensive part of the portfolio.
This not only exposes investors to greater risk, but also shows the importance of comparing like-for-like funds on performance tables.
While the US share market in particular has benefitted from the huge tech sector gains of the past ten years – returning an average of 13.68 per cent – the next 10 years will not be able to generate anywhere near that type of return, given the current high valuations.
Excluding the US, global returns over the past decade have been 6.17 per cent, with this projected to be 5-6 per cent in the coming ten years.
Retirees in particular will seek to preserve their capital throughout retirement which requires a 5 per cent plus return from super, indicating they would need to be invested 100 per cent in the share market to achieve this.
It’s therefore critical for these investors to carefully consider their risk vs return profile. 20 per cent of their portfolio could be in a secure, four-year bucket of future pension payments at 5 per cent per annum, which should be sufficient to provide liquidity in the event there’s a significant pull back in share markets, without needing to sell shares at the worst time.