Traditional investing principles unsuitable in decumulation: Research

New research from Milford Asset Management challenges widely accepted investment principles, arguing retirement portfolios require a fundamentally different approach from those built during the accumulation phase.

The paper, When Timing Becomes the Biggest Risk in Retirement, contends investing principles such as 'time in the market beats timing the market' are redundant when it comes to retirement money.

Traditional investing concepts that serve investors well during their working years, including buying the dip, dollar-cost averaging and focusing on long-term average returns, can become less effective, and in some cases counterproductive, in decumulation.

"Some popular metrics that work well in an accumulation context are ill suited to decumulation mode. Standard deviation, for example, treats upside and downside volatility as equally bad, which they are not," the paper read.

"A portfolio that occasionally surges and a portfolio that occasionally crashes may have identical standard deviations, but as we have shown, their retirement outcomes will be worlds apart."

Furthermore, financial advisers traditionally focus on sequencing risk in retirement but overlooked a broader set of interconnected threats, including loss asymmetry, volatility drag and what the research coins as "dollar-cost ravaging".

The research found such factors do not operate independently, rather compound one another once investors begin drawing a regular income, altering the mathematics of portfolio management and potentially accelerating the depletion of retirement savings.

Milford head of country for asset management Australia Regan van Berlo said retirement portfolios needed to be viewed through a fundamentally different lens.

"Once clients begin drawing an income, market losses, withdrawals and volatility no longer operate in isolation. They interact in ways that can permanently impair retirement outcomes, even where long-term average returns appear attractive," he said.

"That's why we believe advisers need a broader framework for evaluating retirement portfolios. Looking only at expected returns is no longer enough. Downside capture, recovery characteristics and the way portfolios behave during periods of market stress become critically important."

Overall, the research found dollar-cost averaging is "no longer an investor's friend" and with the impact of small timing decisions being magnified, "the maths favours strategies which limit downside losses - even at the cost of lower upside capture - by exponentially lowering the required recovery."

"From an adviser perspective, the real market data is unambiguous on the merits of upside/downside trade-offs. By using metrics more suited to decumulation, advisers are better equipped to ask the right questions of fund managers, and to build portfolios more capable of sustaining retirement incomes over the long term," the paper read.