Home / Markets / Hold tight: Retirees urged to ride out market turbulence

It was lance corporal Jones of Dad’s Army fame who immortalised those two words, ‘don’t panic’. It’s exactly the right advice for those in retirement who are seeing equity markets see-saw due to geo-political events, profit-taking and rising Japanese interest rates.

When share markets tumbled early last week, retirees – especially of the self-funded variety – could be forgiven for breaking out in a cold sweat.

After all, they were major corrections. The ASX/S&P all-ordinaries index fell 3.7 per cent on Monday – its worst performance since early COVID in 2020 – to close the day at 7859.4. But that fall was dwarfed by events in Japan where the Nikkei index was down 12.4 per cent. Add in the falls on Tuesday and the previous Friday, and the Nikkei, which had been enjoying a bull run after many years in the doldrums, surrendered all the gains of the past nine months.

To complete the dismal picture for investors on Monday, the bellwether US index, the S&P 500, was down three per cent.

At times such as these it’s easy to panic. While everyone knows that adage, ‘buy on weakness, sell on strength’, it’s much harder to hold your nerve when your nest egg is dwindling before your very eyes.

So, it’s important to remember market corrections are the norm. Financial advisory firm Partners Wealth Group director of wealth Rob Hand observes that since the 1980s, the US market has had a 10 per cent or more correction once a year (except 1995 and 2017), and Australia usually follows this lead. [When the markets closed on Tuesday, all three indices had regained some lost ground.]

“Our clear message to clients is ‘don’t panic’ – a well-designed actively managed portfolios is intended to weather times like this. In good times (which last a lot longer than bad times) investors often can’t remember specific times there were significant market corrections, and what we are experiencing now is no different to what we have been through in the past,” Hand tells The Golden Times.

“In the past 15 years COVID, the Russian-Ukrainian conflict and GFC have been the major market corrections, and all of these have historically provided buying opportunities before the market stabilises again, with the average time to recovery from a five to 10 per cent correction being three months. The average time to recovery from a 10 per cent to 20 per cent correction is eight months.”

He said asset allocation was important for getting risk-adjusted returns when markets were rising, but also did a very good job of protecting portfolios when markets were volatile. “Another strategy that can work well is by having an allocation to private market or unlisted assets, which typically have zero correlation to sharemarket fluctuations.”

Charlie Viola, managing director of wealth at financial advisory firm Pitcher Partners, said its advice to retirees never varies.

“Asset quality and diversity remain the key ingredients in continuing to protect value and generate revenue through the cycle. We position portfolios so they are well diversified, but also so that they have some cash on hand to ensure pensions can be paid, and to take advantage of weakness when it comes about,” Viola says.

“Protection from volatility comes during the good times – the result of sticking to broad-based fundamentals of buying assets that will generate revenue through most market conditions and ensuring we generate that revenue from different asset types.”

Voila added that some investors still get nervous, so it’s critical to work through a portfolio, line by line, to discuss the risk.

“We try and judge risk by the chances of impairment, not volatility. We also work hard to show the client what revenue they should expect, so they can feel comfortable that despite what’s happening, they’re still generating cash.”

Stellar Capital founding partner David Leon cites three factors triggering the sell-off.

Inevitability: Equity indices have seen significant gains this year and a pull-back is a healthy and expected part of any long-term economic expansion.

Geopolitical risks: Tensions in the Middle East have heightened, adding to investor anxiety.

US presidential election: The 2024 presidential election has become tighter since the debates and the introduction of a new Democrat candidate. Historically, markets rally regardless of whether Democrats or Republicans win.

To this list investment adviser Atchison Consultants principal Kev Toohey adds the Japanese central bank’s decision to raise the cash rate from 0.1 per cent to 0.25 per cent – only the second increase in 17 years.

“Although the market was well warned of the Bank of Japan’s intent to take its foot off the loose monetary policy pedal, it’s fair to say the equity market struggled with the news. Globally, investors who have used Japanese debt as a low cost of capital are needing to recalibrate to the realities of the bank shifting policy targets.”

Stellan’s Leon remained remarkably sanguine about the sell-off, arguing that although the recent market turbulence had left some investors feeling uneasy, questioning the strength of the US economy and whether the Fed missed its target for a soft landing.

“The combination of this share market correction, seasonal trends and geopolitical concerns has fuelled fears of a more serious structural change with the US economy. However, historic data and current analysis suggest these reactions are more likely overblown and that this is more likely just another market correction.

“While the recent market volatility might feel unsettling, the longer-term outlook for the global economy, particularly in the US, remains positive and we still anticipate potential gains in the second half of the year. Long term, we believe the big ‘Three D’ themes – decoupling, decarbonisation and digitisation – will provide a foundation for mitigating any potential economic slowdown.”

As he quaintly put it, “corrections are not crash landings; they’re just air pockets on your way to your final destination”.