Playing it safe - investment protection
Markets are up, delivering investors welcome rewards but that doesn’t mean volatility is a thing of the past. Here are some tips for making the most of a rising market while keeping your retirement savings safe.
The Australian sharemarket has gained more than 20% since June 2012 and the wild swings of the past few years have also decreased. However, while volatility has fallen for now, that doesn’t mean it’s gone for good. In a changing world, only one thing is certain — there’ll be plenty more ups and downs ahead. So it makes sense to put protection in place now, especially if you’re approaching retirement.
Stay diversified
It might seem obvious, but diversification is still the single best strategy for reducing risk and smoothing out volatility in investment returns. And while most investors understand the need to diversify, we aren’t always as good at putting theory into practice.
Effective diversification means taking into account all of your wealth — both inside and outside super — and ensuring it’s spread across a range of asset classes, including cash, fixed income investments (such as bonds), property and shares. So, if one asset class underperforms, the others can pick up the slack and keep your investment performance on track.
Because of the high price of Australian property, most of us are disproportionately exposed to the residential property market, simply through the family home. And by global standards, Australians also tend to have a high weighting towards shares, especially Australian shares, leaving us more vulnerable to market downturns.
Fortunately, the right super investment options can help you redress imbalances like these by increasing your allocation to fixed interest and other lower-risk investment choices.
Get the right mix
As well as spreading your money across a range of investments, it’s also important to get the right mix of assets for your personal situation.
As you grow older, your ideal mix will change, with a higher proportion of defensive assets like bonds and cash, and a lower level of growth assets like shares and property. A financial planner can help you choose the right mix for your life stage and investment time frame.
Protect your capital
Another option is to choose a capital-guaranteed investment product that’s specifically designed to limit investment risk, while taking advantage of market gains.
For example, MLC MasterKey’s Investment Protection – Capital Protection option, lets you lock in your capital for between 10 and 20 years. If the market falls, you don’t need to worry, because your capital is protected. But if it rises, you’ll also receive the increase on your investment, with gains locked in every year. You’ll also have the option to increase the protected value, so you can keep adding to your super before retirement.
Lock in an income
When you’re ready to retire, an annuity is one way to protect against a fall in the value of your retirement savings.
Annuities are like life insurance policies, which pay a guaranteed income stream for the term of the contract. An annuity gives you certainty over how long your payments will last. And because your annuity is paid up-front, you won’t be at the mercy of market falls. However, you also won’t receive the benefit of any improvements in the market, which means you lose the opportunity for investment growth.
You can also protect your income, in the same way as your capital, with products like MLC MasterKey’s Protected Income option.
Like an annuity, this option guarantees the income you’ll receive for a fixed term of 10 to 20 years.
But unlike an annuity, you’ll also benefit from any growth in your capital, with the confidence of knowing your income is protected if the market falls.
Get the right advice
The nearer to retirement you are, the less time you have to make up for any losses, and the more important protection becomes. But, while you can’t remove risk entirely, there are steps you can take to protect your portfolio. Finding the right balance between risk and reward is different for everyone, so it’s essential to seek professional advice before making an investment decision.
To find out more about our capital and income protection investment solutions, contact us on (03) 9832 0677.