How to prepare for volatility in the financial markets
You’ve spent a lifetime working hard to make sure your nest egg is big enough to go the distance, but in periods of volatility the prospect of it not doing so is concerning.
One of the best things you can do to protect your nest egg and standard of living, is by preparing for volatility ahead of time, through diversification. As superannuation fund Equip notes, “The underlying philosophy of diversification is that while one asset class may experience flat or negative returns, another within your portfolio may deliver positive returns. It's a slightly conservative approach to investing, but avoids placing all your bets on one horse and generally delivers solid growth over the long term.”
We’re going to take a look at the value of diversification, and how preparing the nature of your nest egg ahead of time can save you from financial pain in volatile periods.
Are you diversified?
Diversification refers to the possession of a variety of investments among different asset classes. So, for example, if you’ve invested in the share market, own property and expect to draw an income from superannuation, you would have a diversified portfolio.
Conversely, if you are only expecting to have one source of income in retirement, regardless of how substantial, your nest egg could be sitting at the mercy of market forces outside your control.
What are the advantages?
There is a range of advantages that come from diversifying your portfolio, including:
- Minimising your exposure to risk – For example, during periods of share market volatility, your share portfolio may suffer losses. But if you hold investments in other asset classes such as fixed interest or direct property, they may perform better over the same period and the returns from these investments will offset the losses in other parts of your portfolio.
- Increase your degree of control – There’s nothing you can do about interest rates, the share market and property prices, but diversifying your portfolio ensures you’re in a good position to maintain the size of your nest eggs during difficult investment periods.
- More consistent returns over medium to long term – As Equip notes, the number of Australians aged 85 and over is, “expected to quadruple from around 400,000 in 2010 to 1.8 million by 2050.” Diversification offers more consistent returns over the medium to long term and can help make sure you don't run out of funds in retirement.
How do I become diversified?
While the advantages of diversification are clear, the manner in which we achieve it is somewhat less so. The good news is there are a lot of options for today’s retirees to spread their investments out and minimise their rise.
For example, Equip offers diversified investment options to ensure your assets are spread out over more than one asset class. As Equip notes, “You can choose the option that best meets your personal financial goals and tolerance to risk, then leave it up to Equip’s investment team to manage your asset allocations.”
Equip manages $7 billion of investments for members working across a wide range of Australian industry sectors. This superannuation fund has been providing strong investment performance and has been a reliable provider of retirement benefits for over 80 years.
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