Risk Investing in Retirement

Looking to generate an income from your investment portfolio in retirement? You need to be aware of the difference between market volatility and the real risk of losing cash

Dan Kemp 16 November, 2016 | 12:21PM
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The search for income is becoming increasingly desperate in a world of very low yields. Consequently, income focused investors face a difficult choice between higher volatility or higher risk in their portfolios. That sentence may strike you as odd because the financial services industry has typically equated risk with volatility, but in reality they are different and it has never been so important for income investors and their advisers to recognise this difference.

In this context, risk is defined as the potential for a permanent loss of capital or more precisely, a reduction in the value of an asset that is not expected to be recovered within the investment horizon. Permanent losses are primarily driven by valuation – the risk of overpaying for an asset, fundamentals – the risk that an asset deteriorates in quality, or financing – risks associated with gearing and redemptions.

In contrast, volatility describes average deviation in asset prices. While volatility is relevant for income focused investors due to the well-known impact of path-dependency, the former is most important as income investors are particularly exposed to a significant decline in asset prices. Such declines tend to be valuation driven and hence investors must avoid the siren song of low volatility income producing assets that are severely overpriced.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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