The only way to address inflation risk and longevity risk is to invest in growth assets, according to a leading financial author.
“You can’t just be invested for interest to deal with inflation risk and longevity risk. You need to have growth assets where you’re getting some growth in the capital as well as an income stream coming through,” Colin Nicholson told last month’s 2016 Australian Investors Association conference on the Gold Coast.
Nicholson explained inflation risk as the inability of money to retain its value over time and longevity risk as the danger individuals will end up outliving their retirement savings.
He pointed out though that managing those two elements would actually expose people to a third type of risk.
“Once we invest in growth assets to deal with inflation and longevity risk, then we need to take into account market risk,” he said.
“Market risk is fluctuations in our capital. That’s because we own growth assets and their value changes over time.”
He warned against strategies that ruled out participating in investment markets simply to avoid market risk.
“If you try to avoid market risk, you actually increase or magnify the other two risks,” he said.
In regard to market risk, he said shares were more susceptible than other asset classes, but that did not mean it was not a factor in all markets.
“The same thing happens in the property market, but we don’t have the same kind of exchange as we do with shares, but that doesn’t alter the fact that property changes its value over time,” he said.
He added a fundamental activity of managing market risk was also having to deal with both big and small bear markets.