There are four principal risks when it comes to investing in retirement – longevity, inflation, market volatility and behavioural factors.

When market volatility hits in retirement, for example, it is no longer merely a case of investors losing money on an investment that can be made up at a later date. If this happens at the wrong time, the opportunity to recoup the loss may simply not exist the way it does at the accumulation stage.

The role of multi-asset

A multi-asset solution can help minimise volatility – offering protection on the downside while still affording the opportunity to capture upside. The large amount of data now available on different asset classes means this can be used to help build a portfolio to counteract big swings in volatility.

The key objective of any retirement pot will be that it generates an income – with the hope that it will grow with, or slightly ahead, of inflation and add some capital growth on top. While it is all very well in theory to try and ‘shoot the lights out’ for the possibility of gains of 20% or 30% a year, it is unrealistic to rely on achieving such a return – dangerous too. Investors would be taking huge amounts of risk trying to achieve that extra growth.

Multi-asset can help to smooth a pension pot’s trajectory and performance. It removes the outliers – the extreme risk events that can occur – and spreads risk across different asset classes. In so doing, it goes beyond the traditional equity-bond split, as investors can have, for example, property, commodities, absolute return and real assets.

Measuring risk

Measuring investment risk in retirement is constantly evolving. One of the biggest lessons learned is it is not enough to stick to a traditional model. The construction of a multi-asset strategy needs to be fluid and flexible. Part of the issue here is that risk is evolving too – there are now better data on asset class correlations, but the way the asset classes are interacting with each other changes all the time. Hand in hand product development is also evolving, with thematic and responsible investing funds on the rise, the specialist knowledge required to evaluate and monitor them are needed too.

The danger of assumptions

Many assumptions are made about the risk of different asset classes – that government bonds are ‘low risk’, equities ‘high risk’ and so on. That is, however, a rigid approach, and the reality is that risk changes over time and with events. In the wake of the global financial crisis, and during some stages of the Covid pandemic, we saw equities and bonds rise together, which is not traditionally the model. That is the nature of investing, however – the same characteristics do not necessarily run throughout every cycle.

People typically recognise risk after the event but consider the example of government bonds. With negative yield in parts of the world and yields edging close to zero elsewhere, they can become very risky, very quickly – particularly in an environment of significant rate rises. The chances are you could then lose a lot of money as an investor. That is not to say equities do not tend to be higher risk than government bonds, say, but the risk relationship needs to be monitored.

Circumstances create risk more than any asset class necessarily does itself. Having a cross-section of asset classes through a multi-asset solution is therefore one way to ensure you are monitoring those risk relationships while also capturing potential upside in retirement.