The Effects of Sequencing Risk - A Key Investor Concern

A significant issue in the wake of the global financial crisis, sequencing risk (or the order in which returns occur) is emerging again as a key investor concern especially for people approaching retirement. Incurring a significant negative return early in retirement can lead to the permanent erosion of retirement capital if you are forced to sell growth assets such as shares to fund your living needs while markets are depressed. Strong returns from shares and property over the last few years have contributed to an appetite to invest more heavily in these areas, while relatively low returns from cash and fixed interest investments have impacted investor behaviour to the point where cash is seen as having little or no value in a portfolio.

At Baumgartner Financial Services we believe retaining a cash reserve is always an important part of a retirement portfolio as it acts as a financial shock absorber. ‘When’ we experience the next market downturn, a cash reserve is very unlikely to be impacted, especially as the Federal Government’s $250,000 capped Guarantee still applies (click here for more details). Like a lake in a drought, a cash reserve can be drawn from to fund your needs until the ‘rains’ return and your portfolio’s growth assets have had a chance to recover.

If you have any concerns over sequencing risk or other aspects of your portfolio please give us a call on 03 9851 9024 or email b.hunt@baumgartnerfs.com.au for an initial no obligation consultation.