Balancing Capital Preservation and Volatility in Retirement Investments
For retirees, preserving capital is generally their highest priority. As the focus shifts toward maintaining a stable income stream, managing the trade-offs between volatility, liquidity, and investment returns becomes crucial.
Volatility: A Bigger Concern for Retirees
Volatility, or how much the value of an investment fluctuates, is a significant risk factor, especially for retirees. High volatility can erode capital quickly, posing a substantial risk for those who don’t have time for markets to recover. Real estate credit funds are less volatile than listed investments because they aren't subject to daily stock market fluctuations. This capital stability may appeal to retirees concerned about preserving their nest egg.
Understanding Liquidity and its Trade-Offs
Liquidity refers to how quickly an investment can be converted into cash. For example, ASX-listed assets offer high liquidity, typically allowing conversion within three business days. This convenience often comes at the expense of lower returns. Some investors may prioritise this flexibility, accepting lower returns to access their funds quickly. However, real estate credit funds provide a "liquidity premium," offering higher returns in exchange for tying up money in less liquid investments. Unlike listed assets, these funds can take six to twelve months or longer to convert into cash. The reduced liquidity is the trade-off for potentially higher returns, making real estate credit funds more suitable for those willing to commit to a longer-term investment.
Key Considerations
When comparing real estate credit funds to listed investments, the key differences are:
• Lower Volatility: Real estate credit funds offer a more stable investment with less exposure to market fluctuations, which can help protect capital in retirement.
• Higher Returns: The liquidity premium in real estate credit funds can provide higher overall returns compared to listed
investments.
• Reduced Liquidity: The trade-off for stability and higher returns is reduced liquidity, requiring a somewhat longer-term commitment.
Understanding these factors can help retirees select investments that align with their goals of capital preservation and stable income, even if it means sacrificing some liquidity.
Disclaimer: Past performance is not indicative of future performance. The distributions and investment returns depend on the performance of the underlying investments. Information contained within this post does not constitute financial advice, nor is it a personal recommendation. Capital Property Funds is not authorised or qualified to provide financial advice or to make an investment recommendation. Information contained within this post is general in nature and has been prepared without regard to the individual objectives, financial situation, or requirements of any person. Prospective investors should seek personal financial and legal advice before deciding to invest.
