The year was 2006 and Gary & Janet had been married for 27 years and were contemplating retirement as they were both nearing 60, their children were now living independently and their investments were really well placed including their industry based super funds which had been providing massive returns year by year.
They had always looked after their own finances and thought they had a pretty good handle on this but, prior to retirement they thought it prudent to see a financial planner and were recommended to us. We had a look over their situation and, on the face of it, everything seemed pretty good – wills in place, powers of attorney in place, some solid investment properties and a healthy super balance with a well reputed industry fund. But something just didn’t feel right……… it was almost too right.
A closer inspection of the super fund showed that Gary & Janet were allocated to the default strategy within the fund which had served them very well to date as it was called a “Balanced Growth Fund” and had 75% aggressive assets and 25% defensive assets. Heading into retirement with protecting the wealth built up Gary & Janet had no concept just how aggressive this could be.
Following an extensive discussion regarding “risk vs return” we determined that Gary and Janet were far better placed for a less aggressive structure and moved their investments to 50% aggressive and 25% defensive along with some additional planning to increase liquidity and income focus in their investments.
In the following three years after this change the Global Financial Crisis was at its peak and a number of Gary and Janet’s close friends in similar positions lost a large portion of their retirement savings which remained in aggressive superannuation portfolios.
On the other hand, Gary and Janet’s superannuation savings held up during the GFC – they still had a small loss but nothing like the losses suffered by their friends. The combination of a portfolio suited to their risk profile together with an income rather than growth focus meant that the losses from the market were reduced and most of the losses were offset by an increased level of income.
Risk profiling was the key to this outcome. In a world of immediacy and instant solutions, the importance of risk profiling can be quickly lost. Returns should never be based upon a single month, single quarter or even a single year. Returns must be viewed in the context of risk taken and risk profiling. The S&P 500 (the largest share market in the world) has negative returns on 46% of trading days, yet the worst return over any 20 year investment term was 54% positive return. Over any 30 year period the worst return was 854% positive return.
So the questions each investor must ask are:
- How much of a short term loss can I sustain before I am nervous?
- How long a period can I stay with my convictions before I start second guessing my decisions?
- What is my primary objective from my investment mix?
- What is the time frame for my investment period (remember the day you stop investing is either the day your money runs out or the day you die – whatever comes first)?
- Do I even understand my own risk profile?
- What education do I need to understand risk profile more soundly so I avoid any rash decisions?
If you are unsure about your investment portfolio, register your interest for our FREE “Is your retirement plan measuring up?” seminar, where we will discuss this topic and more.
When: Thursday 16th February 2017
Where: Sunbury Football Club
Register your interest NOW