Financial adviser Romi Bitar likes to simplify financial advice for his clients with a good sporting analogy.

“Don Bradman went out for a duck in his last innings but he still averaged 99.94 runs, so you’ve got to look at the whole picture to get a meaningful summary,” he says.

But for some investors it can still be catastrophic. Long-term average returns are important but a ‘duck’ – or market crash – at the wrong time can derail risk-averse investors such as retirees.

“When the share market crashes, wouldn’t you rather a soft landing compared to a hard landing? We try and smooth returns out as best we can.”

Milliman’s SmartShield range of separately managed accounts, which were launched in early-2020 just as the COVID-19 downturn hit, have recently become part of Bitar’s investment toolkit.

Each portfolio provides built-in risk management, designed to help manage pre-retirees’ and retirees’ exposure to sequencing risk. It also helps to keep investors from making poor decisions, giving them the confidence to stay invested during a market downturn.

Investors concerned about rising cost of living

Australia’s inflation rate is now running at a two-decade high of 5.1% – more than twice the rate of wages growth – and many of Bitar’s clients are becoming concerned about the rising cost of living. The ongoing market impact of the Russia-Ukraine war is another wildcard adding to investor uncertainty.

“I have people saying to me, ‘Do I just go pulling out all my money from the share market and put it in bank accounts? I won't have any of this volatility’. But while you might think you're preserving capital, inflation is eroding its worth. If something was costing $1 this year, it may very well cost you $1.10 next year based on the current inflation trend rate.”

Many older investors are still concerned they’ll run out of money in retirement. They need regular stable returns but must take on more market risk to generate them given interest rates remain well below the rate of inflation.

Bitar considers himself a financial coach and helps educate clients to match their lifestyle goals with their age.

“We all know that as people age through their late-60s and 70s, their spending drops off significantly – they have undertaken and funded their big-ticket items reducing their ongoing income requirements in most instances. That's where we've been having those conversations and it's good to have a little solution for that.”

The Milliman SmartShield hedging strategy dampens market volatility and provides protection against systemic market falls. It uses futures contracts dynamically so investors can have greater participation when markets are strong, and more protection when volatility spikes. Fees are kept low by leveraging Milliman’s institutional scale and using ETFs to build the underlying Moderate, Balanced, Growth and High Growth portfolios.

A way to manage behaviour during stressful events

Risk can also adversely affect younger investors. One client turned up unexpectedly at his Financial Solutions Victoria office during the peak COVID-19 downturn in early-2020.

“He just happened to be there standing at the front of our office – he had a coffee for me and one for him. He said, ‘I couldn't sleep. I understand you're going to try and talk me out of it, but I'm not leaving here until you sell down all my investments.”

The client’s insistence on selling ultimately cost him about $25,000 as the market went on to post one of the quickest recoveries in history. However, he is now in a SmartShield portfolio, which provides an extra layer of downside protection against volatility and any extended market downturn.

“I caught up with him a couple of weeks ago and he didn't really say much – I think he's more appreciative now of the investments he’s in and the difference,” Bitar says.

Bitar likens the approach to insurance.

“If they're younger and have financial obligations and a family, we use insurance to manage the risk of a major catastrophe such as death, total disability or injury/illness. We use that philosophy to manage the risk with investments – you might not get exactly the full return that you would if you were fully invested in the markets the whole time, but it does give you more peace of mind.”

SmartShield high growth cumulative net performance since inception

You can check the potential benefits of downside protection on your own client portfolios by using Milliman's SmartShield digital portfolio simulator at: https://advice.milliman.com/en/insight/The-SmartShield-digital-portfolio-simulator.

For more information about Milliman’s SmartShield Managed Accounts, please email [email protected].

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