Financial advisers may need to help retirees increase their defensive equity allocations to protect capital during downturns and corrections, according to Copia investment partner, Vertium Asset Management.
Its June quarterly research paper compared the past seven share market corrections during global slowdowns since 1990, to the most recent correction in December 2018.
Each correction that had a decline in the share market index averaged 19 per cent, with a low-to-high recovery time of 1.4 years.
However, the December 2018 equity market dip had been different, recording only half of the historical decline, 11 per cent, and one third of the recovery duration, five months.
This had raised the question if the market would continue its unusually quick recovery or follow the more common scenario of longer recovery with another potential downward correction.
Jason Teh, Vertium chief investment officer, said lowering the sensitivity to market movements could be a shield from potential market corrections.
“An efficient way to achieve this is to allocate more to funds with low correlation to the market, so if the market declines, that portfolio is not fully tethered to the decline in capital values,” Teh said.
He pointed to Vertium's low sensitivity, which had calculated its volatility risk measure as being half of the S&P/ASX 300 Index, with a Beta measure of 0.5.
That low sensitivity that was put into place cushioned their capital by about 50 per cent, with the expectation they would deliver six per cent income in the next 12 months.