No sense moving retirees to conservative investments

The commonly held view that investors should shift their portfolio to a more conservative asset allocation once they move into the drawdown phase will actually increase their longevity risk and reduce the amount of time their savings last into retirement, according to financial services consultants Path Independent.

By analysing historical equity market data from the year 1900, the firm found that in a large majority of cases a high allocation to equities in a portfolio would have helped increase the portfolio longevity of retirees.

True longevity risk in a portfolio comes not from volatility during the drawdown phase but from the likelihood funds will be depleted during the lifetime of the investor, which happens with far greater frequency in a conservative portfolio than a growth portfolio, according to Path Independent managing director Geoff Watkins.

The greatest negative long-term impact on growth portfolios resulted not from short severe downturns such as the Great Depression but from extended periods of high inflation such as that seen in the 1970s, according to the report.

But even in the few timeframes where conservative portfolios outperformed growth over a long period, this improvement was minor — a total longevity improvement of only one or two years, Watkins said.

By contrast, the median growth portfolio over the entire dataset lasted 40 years, compared to 35 years for the median balanced portfolio and 25 years for a median conservative portfolio. There was little difference between the three portfolio styles over the past 24 years, however.

The findings suggest a big rethink to post-retirement asset allocation may be required, with no evidence to support a shift to a more conservative structure, Watkins said.

Even in the event of a GFC-type downturn there is only a small proportion of the portfolio that would be drawn down before the markets recovered, leaving the bulk of the portfolio positioned for future growth, he said.