A portfolio mix of 35% equities and 65% fixed income can protect against sequential risk and prevent retirees from outliving their wealth, suggests new research from Russell Investments Canada.

“One of the biggest concerns that investors are facing this very moment is the ability of their portfolios to withstand negative portfolio returns in the five years before retirement or in the first few years of retirement when withdrawals are made,” says Irshaad Ahmad, president of Russell Investments Canada Ltd.

“This concern is otherwise known as sequential risk: The risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments.”

Ahmad says that the importance of guarding against sequential risk can easily be explained using three portfolios (A, B, and C) with a starting balance of $1,000,000. The asset mix for the portfolios is 60% equities and 40% fixed income and the return expectations are based on Russell’s long-term capital market forecasts. Each portfolio also has a withdrawal amount of $50,000, indexed at 3% annually.

“Portfolio A is an example of what some clients may be facing right now. Although all three portfolios averaged a 7.4% return over 30 years, Portfolio A had a value of $0 at the end of the 30 years due to the negative returns (-15%) it experienced in the first year of $50,000 withdrawals. In fact, Portfolio A only lasted 27 years, increasing the likelihood that a client faces longevity risk by outliving their investments,” explains Ahmad.

“The difference in the ending values of each portfolio is alarming and should help clients understand the very real possibility that their nest egg may not be able to withstand the current market volatility without professional financial advice.”

New research from Russell Investments found that a 35% equity / 65% fixed income asset mix is one of the most effective strategies to protect against sequential risk and today’s markets.

“The conservative portfolios of 100% fixed income and 100% cash provide stability but little in terms of longer term growth and may not last throughout your retirement years. On the other hand, the 100% equity portfolio achieves higher long-term growth, along with much higher risk and uncertainty,” says Ahmad.

“A 35/65 mix, such as the one featured in the Russell Retirement Essentials Portfolio (RREP), represents a conservative offering for those who are in retirement or those planning for retirement through investment vehicles such as RRSPs and TFSAs. It is ideal for protecting against sequential risk and making sure essential expenses are covered during retirement. The portfolio represents the right asset mix to achieve peace of mind during this time of great volatility,” Ahmad says.

IE