Is putting all your eggs in one basket a good idea?

May 2016


When thinking about risks associated with pensions, most people automatically think about losing money. However, the risk of outliving your savings is another key consideration for retirees.

While it’s impossible to eliminate all risks, we recently spoke with UniSuper Private Client Adviser Gina Abuda about how diversification can help protect your capital—while also increasing the chances your savings will last the distance.

There’s a popular belief that you should invest conservatively in retirement to help protect the money you have. What’s your take on this?

Statistics show that a 65-year-old retiree can expect to spend around 21 years in retirement.1  So, while there’s a definite need to manage risk in retirement, playing it too safe could turn out to be risky in itself.

That’s because your investment might not generate the level of income you need to live comfortably for the rest of your life. You could also run the risk that your returns may not keep up with inflation. As a result, you may need to withdraw some of your retirement savings earlier than planned to meet your desired level of income.

That’s why it’s important to consider investment strategies that have the potential to provide investment returns above inflation over time—particularly if your pension is going to remain invested for a number of years.

So, does this mean retirees should chase high returns by pursuing a more aggressive investment strategy?

Not necessarily. Investing all your hard-earned retirement savings in an aggressive strategy, with high exposure to growth assets like shares, can be just as risky as being overly conservative.

Growth assets generally have a higher return potential over the long term. But they’re also subject to market volatility, which can have a negative impact on your balance in the short term.

So, it’s important to find a balance between maintaining a level of downside protection over the short term, while still growing your investment to help maintain your income over the long term.

What strategies can members consider to help manage investment risk in retirement?

Diversify, diversify, diversify!

In simple terms, diversification is about spreading your investment across a range of different assets, asset classes—such as shares, property, fixed interest and cash— countries or investment managers to reduce risk and minimise volatility.

Investing across a variety of assets types—that typically react differently to the same event—helps increase your chances that at least a part of your portfolio will be performing well, even if other parts aren’t.

Of course, your allocation to each of these asset classes should be based on your investment goals and tolerance for risk.

When determining your investment strategy, you should also consider your short-term income requirements and whether you might need to access a lump sum(s) to cover any major expenses—like a car, major home renovations and holidays—as funds for these expenses may need to be invested differently (and potentially more conservatively)  to the rest of your portfolio.

Why is diversification important in retirement?

Diversification’s all about mitigating the risk that your investments will lose value and possibly wipe out a significant portion of your savings.

Investing your assets too conservatively in the early stages of retirement may mean you run the risk that your investment won’t earn enough income to keep up with inflation.

On the other hand, if you invest too aggressively, you may end up too exposed to market volatility—which could erode your retirement savings at an age when you have fewer opportunities to recoup these losses.

A well-diversified investment portfolio strives to smooth out market volatility, with the positive performance of some investments helping to compensate for the negative performance of others.

What are your key tips for UniSuper members considering their investment strategy?

Keep in mind that retiring from work doesn’t mean retiring from investing. When you’re living off your super, it’s even more important to avoid a ‘set-and-forget’ approach.

While diversification can help manage your exposure to risk, your personal circumstance can change over time.

Remember to reassess your goals and strategy from time to time and make adjustments where necessary.

When considering your approach to risk and return, the key is finding a balance you’re comfortable with. Your investment strategy should help you maintain your long-term income while still allowing you to get a good night's sleep.

Need help?

UniSuper Advice can help with strategies to manage risk, while giving your growth assets time to grow.

Find out more about UniSuper Advice or call us on 1300 331 685. You may also find our online Investment choice tool helpful for exploring potential changes to your portfolio.

1.  Australian Institute of Health and Welfare, Trends in life expectancy