An investor’s portfolio will last longer into retirement by maintaining a growth-based asset allocation rather than switching to a conservative allocation, according to financial services consultants Path Independent.
The popular practice of switching to a conservative allocation in retirement to protect capital in the event of a downturn actually increases the longevity risk because a retiree’s funds are likely to run out earlier, according to Path Independent managing director Geoff Watkins.
By analysing historical equity market data from the year 1900, the firm found that 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.
Just one in five growth portfolios would have been depleted within 30 years of retirement throughout the records (allowing for a five per cent drawdown), compared to three out of five conservative portfolios, the report found.
Portfolios were more impacted by long periods of inflation such as that seen in the 1970s than they were by shorter downturns such as the Great Depression because they were more able to recover, the study found.
Adding further weight to the argument for maintaining a growth allocation, even in the few timeframes where conservative portfolios outlasted growth over a long period the improvement was minor – a total longevity improvement of only one or two years, Watkins said.
This is because in a 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.
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.
