Question 1

Hello Craig. I recently retired at 61 and have a defined benefit pension that covers needs. Given world events and market uncertainty, I’d welcome your thoughts on whether I should proceed with converting (some/most) of my accumulation fund to an income pension stream or wait for the market to settle (as much as markets do).

I have flexibility in timing for this. Is it better to hold funds in accumulation or a pension account for the future?   

Also, do you suggest a more conservative risk profile in volatile times like now e.g. allocate a portion of funds (for the income stream?) to a “conservative” profile? I have all funds in “conservative balanced” risk profile and would like to know your thoughts on the benefits of holding or adjusting the risk profile. I am comfortable with some risk but unsure how to pair that with market volatility.   

Thanks so much, S.

Hi S,

You have raised two questions.

First, whether you should start a pension or leave funds in accumulation. However, it sounds like it’s related to the second part of your question about market risk.

Let’s deal with market risk, i.e. the risk that the value of your investments will go down. A lot of people start to consider this risk only AFTER markets have started to go down.

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I don’t advocate changing your investment options based on current market conditions. It’s just too hard to get right.

Here are some key points around this:

Markets are unpredictable

Even seasoned professionals struggle to consistently predict short-term market movements. Missing just a few days of strong market performance can significantly impact long-term returns.

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A study by Vanguard found that missing the 10 best days in the market over a 20-year period could reduce returns by more than a whopping 50 per cent.

Emotional decision-making

Market timing often leads to decisions driven by fear (during downturns) or greed (during rallies). This can result in selling low and buying high – exactly the opposite of a sound investment strategy. Warren Buffet (the world’s most famous investor) constantly talks about doing the opposite of whatever everyone else does. Worked very well for him.

Opportunity cost

Holding funds in cash or low-return assets while waiting for the “right time” can mean missing out on compounding growth. If you wait for markets to start going up, normally you have already missed big gains.

Costs

Frequent switching of investments can incur transaction costs or buy/sell spreads, reducing overall returns. Pension accounts, in your example, benefit from tax-free earnings once in the retirement phase – delaying conversion could mean missing out on these advantages.

Time in the market v timing the market

The most reliable strategy is staying invested over the long term. This is also the easiest thing to do. When I say easy, I don’t mean emotionally – although I realise it’s very hard when TV, social media and friends are taking about how bad things are. When it’s all doom and gloom, people can panic.

A while back, the Australian Stock Exchange produced an article on market timing. It summarised its findings as follows:

• Timing financial markets is difficult. Markets can be influenced by short-term fluctuations, noise and random events that make it difficult to consistently predict short-term price movements.
• The biggest rallies historically have occurred during or soon after market crashes. Missing out on these rallies can impact returns over the long term. 
• Instead of trying to time the market, consider diversifying your portfolio, focusing on your investment goals, and staying invested for the long run.

It also re-produced this paragraph:

“In summary, diversification and a risk profile* aligned with your goals and comfort level are more effective than trying to outguess the market.

*Speak with your super fund or a financial adviser about coming up with a long term risk profile you can stick with.”

Question 2

I would like to better understand the worth or otherwise of maintaining our current joint heath insurance when my wife is in aged care and I am still in the family home. Centrelink assesses us as being separate. 

Regards, Bob

Hi Bob,

That’s a good question. Aged care is a specialist area, and one in which people should seek specialised advice.

I ran your question past aged-care specialist Jennifer Langton at Aged Care Steps to get her response:

It is something I am asked quite often and there is no right or wrong answer – it comes down to a personal choice. 

Once a person is an aged-care resident, their daily living and care needs will be met by the facility and they are still covered by the Medicare system for their health and medical needs.  

If a resident suffers a fall or illness that requires medical treatment, they will be transferred to the local hospital and brought back to their care facility as soon as they are fit to be discharged.   

If the family would still like to maintain the benefits of private cover, such as choice of specialist and other ancillary benefits such as optical and dental, then they may want to maintain the insurance.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.