Understanding sequencing risk vital
Sequencing risk can have a catastrophic impact on a self managed super fund (SMSF), according to Michael E. Drew, professor of finance at Griffith University and partner at Drew, Walk & Co.
Professor Drew, who defined sequencing risk as 'the worst returns in their worst order' during a presentation to the SMSF Professionals' Association of Australia (SPAA) technical conference, said that sequencing risk was still not comprehended fully by financial planners but it was imperative that they understood the dire consequences it could have for their clients.
"When you consider recent data suggesting that SMSFs can have around two-thirds growth assets and one-third defensive assets - in effect, similar to the default option of many APRA-regulated funds - then there is a genuine risk of SMSF trustees falling foul of sequencing because of their asset allocation decisions," he said.
"What is required for financial advisers is to review their clients' investment strategy on a regular basis, taking an outcome-oriented approach to portfolio construction."
Professor Drew said that research on sequencing risk had shown that what was safe and what was risky could and inevitably would change over the span of someone's life.
"Navigating safe passage through the retirement risk zone is vital to ensuring sustainable retirement outcomes," he said.
Originally published by SMSF Essentials.
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