The advantage of this approach is that there is a greater probability of a portfolio lasting longer than a unitised version as it gives the equities a chance to recover. Therefore, the decade preceding retirement should be focused on getting a portfolio set up both to contribute now and in the future.
Furthermore, asset allocation should not just end at assets and geographies. Exploring the sectors and their return drivers is equally as important in formulating an asset allocation strategy for clients. Afterall, having a considerable weighting to the UK might mean missing out on many industries primed to do well over the long-term due to the way indices are constructed.
As we have seen in recent years much of the returns offered by global markets has come from just a handful of technology companies. This is unlikely to continue, but it is those growth stocks a client will need 10 years out from retirement. As they get closer to the desired retirement date then moving to more quality or defensive sectors is prudent to ensure they get exposure to consistent cash flows and well-run businesses.
Particularly as the global recovery plays out, advisers will need to be alert to which sectors are well placed to benefit and as such ensure their clients are exposed to the right areas without taking on too much risk.
Being alternative
Historically, bonds have been the go-to investment for anyone beginning their journey to retirement. However, with interest rates still at historic lows 14 years on from the beginning of the global financial crisis and showing no signs of improving following the Covid-19 pandemic, the risk in these assets has only increased.
Indeed, we saw earlier this year what a short, sharp movement in yields to pre-pandemic levels did to bond prices. Many cautious investors will have been looking at that episode and think they have nowhere to turn.
However, what this misfortune in the bond market has helped produce is exciting innovation in alternative assets. Multi-asset portfolios these days cannot simply be limited to equities or fixed income. Instead looking to the likes of infrastructure, renewables or hedge funds can give a portfolio a new dimension of uncorrelated returns or income streams, bolstering income during periods of market weakness while not missing out on returns during the sunnier times.
This is not to say bonds play no role in a multi-asset portfolio anymore. Changing demographics will keep demand for bonds elevated, while central banks remain on hand to keep the money taps running to suppress yields should they rise unsustainably.
But again, just like with an equity part of the portfolio, advisers will need to be alive to the opportunities. The rise in yields seen earlier this year, caused as a result of inflation fears, gave investors a good entry point for what has historically been a safe haven asset. Ultimately, they may not have the same characteristics they used to, but bonds can still play a role.
