Will equities always deliver for pensioners?

Looking back at history suggests those planning for retirement should have allocated 100% to equities, but any increase in volatility upsets the models

John Rekenthaler 27 December, 2018 | 6:00PM

Investing for retirement is straightforward: place as much in equities as is comfortable, contribute regularly, keep costs low, and let time do the work. Investing during retirement is far more complex. Additional considerations include working out how much to withdraw from your pot, determining the time horizon, and deciding how flexibly to manage both the portfolio and withdrawal rate in response to stock market meltdowns.

A working paper entitled "Toward Determining the Optimal Investment Strategy for Retirement," by IESE Business School's Javier Estrada and Mark Kritzman of Windham Capital Management, sheds light on how retirement asset allocation is affected by stock market projections.

The authors employ a useful new measure they call the coverage ratio to gauge an investment strategy's success. The coverage ratio is a sound, reasonable way to score a retirement strategy's investment success and that it operates conservatively, by penalising failure more than rewarding success. Therefore, it does not arrive at high equity positions lightly.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.

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