I’m doing portfolio reviews with retiree clients at the moment and they come in expecting the worst.

Considering that global markets got smashed by 30% in a four week period in Feb/March, this is not surprising.

They are pleasantly surprised when I reveal a decrease of only 1.5%, which will be less by the time this article goes live.

One of the keys to understanding how we achieved this outcome is understanding risk, and how it is the crucial foundation your retirement nest egg is built on.

Let’s discuss.

How Much Risk?

When we talk about risk in the context of portfolio performance, we are talking about volatility. More risk means more volatility ie more intense ups and downs, which for most retirees is an undesirable state.

Many of our retiree or pre-retiree client’s portfolios operate on a risk profile of “balanced”.

Super Funds Have Changed Their Risk Profile Definitions

Big brand name industry super funds that dominate our airwaves are not doing a good job of discussing risk with their customers.

A traditional ‘balanced portfolio’ is made up of 50-60% growth assets and 40- 50% in defensive assets. When executed correctly, this portfolio strategy should ensure consistent returns with lower volatility. In other words, lower exposure to market downturns like global pandemics.

But the big brand super funds have changed their definition of “balanced”, with (sometimes a lot) more than 50% of a balanced portfolio in growth assets.

This makes for better portfolio performance than a traditional balanced portfolio during good economic times, which we have had for over a decade since the GFC, which makes for excellent fodder for ad campaigns that can showcase how much they have outperformed ‘other’ balanced funds.

More Growth Assets Means More Exposure

Now for the “but”.

During tough times like we have had recently, this increased proportion of growth assets means far worse performance than a traditional balanced fund. More growth assets equals more volatility which means more exposure during tough economic times.

Which is all 100% fine if that’s what you signed up for. But most retirees aren’t looking for that kind of rollercoaster.

Most are looking for consistent safe returns with low volatility, like the returns form a properly structured 50/50 balanced portfolio.

Check With Your Super Fund

So do your checks. Understand how your super fund defines “balanced” as well as other conservative risk profiles so you can understand how your money is being managed.

And as always, talk to a financial advisor who can give you the full story on your investment that isn’t from your super fund.