Focus on market volatility overshadows other risks

Investors’ caution about market risk and their continuing preference for cash expose them to even more risks, according to Australian Unity Investments head of retail Cameron Dickman.

He said the global financial crisis (GFC) had focused investors’ attention on market risk – leading to a preference for cash – rather than on the ultimate goal of ensuring a retirement income that would last, said Dickman.

“Even now, when volatility has largely returned to pre-GFC levels, many investors are still keeping a significant proportion of their retirement savings in cash options such as term deposits, in the belief that this is the least-risky strategy,” said Dickman.

He said while this approach did minimise market risk, it exposed investors to other risks, like inflation, income and opportunity risk.

He said term deposits, for example, were susceptible to higher levels of inflation – eating away at returns and capital.

“Inflation also means that capital locked up in a non-growth asset will have less value at the end of its two, three and five-year term,” he said, adding that this was also where opportunity risk came in.

“If the money is locked away in a term deposit for two, three or five years, it is money that can’t be used elsewhere – therefore opportunities for better returns and capital growth are being missed,” Dickman explained.

He said the biggest risk for investors at the moment was income risk, since a term deposit could not provide a stable, regular income, which was a priority for baby boomers entering retirement.