Reassess risk caused by rate rises

Rising interest rates will alter the expected returns from shares and fixed interest investments, with retirees cautioned to watch for increased risks.

Retiree investors should be looking to revise their expectations regarding returns and wind back higher risk exposures in the share market as interest rate rises will reset the levels of return, according to an accounting and advisory firm.

HLB Mann Judd wealth management partner Jonathan Philpot said there had been a shift in the rates of return for shares and fixed interest, which had narrowed from about 10 per cent over the past decade to 5 per cent currently due to interest rate movements driving the need to reassess expected returns.

“For the 10 years up to 2022, every additional 10 per cent of a portfolio allocated to risky assets delivered an additional 1 per cent per annum return,” Philpot said.

“For example, the 60/40 balanced portfolio delivered a return of 9 per cent, the 70/30 balanced portfolio around 10 per cent and the 80/20 portfolio 11 per cent.

“However, these returns will not be replicated for the next 10 years. For equities, you should expect a return of 7 to 8 per cent and fixed interest a 3 to 4 per cent return. We’re entering a very different environment for investment returns.”

He said lower volatility and the generation of income were important for retirees who had benefitted from mainly positive returns for the 10 years up to 2021, but following market movements in 2022, consideration should be given to moving away from investments that may become more risky.

“The risk premium is justified as share markets will often move downward within a one-year period of about 10 per cent, so particularly for retirees, the stability of returns over their lifetime is an important factor,” he said.

“For those investors who have increased their risk allocation over the last 10 years, it may be worth starting to consider slowly reducing their exposure to the share market, particularly as markets move into overvalued territory over these next few years.

“Some other asset classes, such as infrastructure investments, high-yield debt and hedge funds, could be considered as alternative investments for share markets, however, it is important to understand the underlying risks in all of the different type of asset classes.”


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