Surging stock markets and savings shortfalls are increasingly driving retirees into risk and this could impact their financial security, warned the CEO of one of a leading independent financial advisory and asset management organisations.
Nigel Green of deVere Group said a “concerning trend” has emerged as retirees and those approaching retirement around the world are increasingly finding themselves drawn to riskier assets, particularly stocks, as a means of bolstering their portfolios.
“While some argue that this shift is driven by the need to hedge against inflation, the more likely reason lies in the allure of a surging bull market,” he said.
Green explained that the MSCI World Index gained 22% overall in 2023, the highest annual increase in the last four years.
“The remarkable performance of Wall Street’s benchmark index, the S&P 500, has notably contributed to this global upswing. The S&P index saw an impressive 24% surge throughout the year, and it continues to hit record highs in 2024.”
The past decade, despite a brief bear run in 2022, has witnessed an unprecedented bull market, a period that has shaped the expectations of investors and retirees alike.
“Elevated portfolio returns have become the norm, creating a sense of complacency among those relying on their investments to fund their retirement. However, the pivotal question looms large – can these expectations of perpetual gains be sustained in the future?”
One driving force behind the willingness of retirees to embrace increased risk in their portfolios is the alarming savings shortfall that many face.
“With the cost of living rising and life expectancy increasing, many retirees are facing the stark reality of insufficient savings to fund their golden years adequately,” said the deVere CEO.
“Grappling with this shortfall, the temptation to seek higher returns in the stock market becomes alluring, as historical data paints a picture of equities outperforming other asset classes in the long run.
Not overstated
“However, the risks associated with this approach cannot be overstated. The first and most immediate concern is the volatility inherent in stock markets.
“While the recent bull run has rewarded investors handsomely, it’s vital to remember that markets are cyclical.”
A sudden downturn, fuelled by economic uncertainties, geopolitical events, or unforeseen crises, could spell disaster for those heavily invested in stocks, Green said.
“Retirees, in particular, face a precarious situation as they may not have the luxury of time to recover from significant market setbacks.”
Furthermore, the lack of diversification in portfolios represents a critical vulnerability. Relying too heavily on stocks exposes retirees to sector-specific risks, making their financial health susceptible to the fluctuations of a particular industry.
“Diversification, a fundamental risk management strategy, is often overlooked in the pursuit of higher returns, leaving retirees with a less resilient portfolio that may crumble in the face of adverse market conditions,” noted Nigel Green.
As retirees navigate the complex terrain of surging stock markets and savings shortfalls, there is an urgent need for caution.
“The assumption that the current bull market will persist indefinitely is speculative at best. It is imperative for retirees and those on the cusp of retirement to reassess their risk tolerance and embrace a more holistic approach to portfolio management.”
This cautionary message underscores the importance of seeking professional financial advice. Engaging with an advisor can help retirees develop a well-balanced portfolio that aligns with their financial goals while considering their individual risk tolerance.
Advisors can play a crucial role in managing expectations, providing insights into the cyclical nature of financial markets, and helping retirees avoid the potential pitfalls of overcommitting to one asset class.
Green concluded that, the risks associated with a heavy reliance on stocks are real and potentially detrimental to financial security in retirement.
“By acknowledging the limitations of the current bull market and working with advisors to implement a diversified and risk-aware investment strategy, retirees will be best-positioned to safeguard their financial well-being.”
