Retirement Portfolio Resilience Perspective
Primary Pillar: Retirement Portfolio Construction
Supporting Pillars: Risk Pricing Discipline • Resilience Across Market Environments
This article examines how thoughtful portfolio construction can help investors manage uncertainty by combining embedded downside protection, regular income and diversified sources of return.
It explains why portfolio construction should be designed to reduce the impact of major market declines rather than relying on favourable market conditions or accurate market prediction. Although written before the Retirement Portfolio Resilience Framework was formally articulated, the article establishes many of the enduring principles that would later define Gyrostat's philosophy of helping investors remain financially and emotionally invested throughout their retirement journey, regardless of the path markets take.
This article forms part of a broader body of research, educational articles and practical insights organised through the Retirement Portfolio Resilience Framework.
MANAGE UNCERTAINTY THROUGH PORTFOLIO CONSTRUCTION
The ‘mystery’ of the unprecedented Central Bank and Federal Government stimulus measures in response to Covid continues to unfold. Will markets continue to be supported and rise, or will the sharply deteriorinating earnings and economic fundamentals see the completion of this extended investment cycle from ‘peak’ to ‘trough’?
More importantly, is your lifestyle fragile to the outcome? It doesn’t need to be through portfolio construction.
Major market falls are a regular and hazardous feature of the investment cycle. Most corrections of > 30-50% occur within 6-12 months and typically within an 8 years cycle. We are now at year 13 which is the longest since 1929.
The premise behind established finance portfolio construction theory to include diversified non correlated assets relates primarily to ‘investment risk management’ –you can prepare for all outcomes without the need to predict. Many portfolios are no longer diversified non correlated as a result of zero bound or negative interest rates. Previously bond interest rates would increase in ‘later cycle’ market conditions and be cut to stimulate the economy on market falls – with bonds acting as a non correlated asset that increased in value on market falls whilst providing regular income. In zero bound interest rates environments (the consensus view in Australia) most defensive assets provide little or no income, nor do they increase in value on market falls if interest rates are no longer to be cut below ‘zero’.
There have been 10 years of Government retirement income reviews in Australia to encourage the development of non correlated financial products that can be added to fortify your portfolio. The various reviews have listed the criteria to satisfy: regular income, capital protection, no lock in periods for investors, transparent pricing, strong counterparty, invest in growth assets for capital gains, no credit default risks.
Gyrostat meet all of these requirements and is a risk managed investing specialist.
