Severe market downturns don't strike often, but they often undo years of hard work.

Confidence evaporates, replaced by uncertainty and fear. They prompt investors to sell at the worst possible time, locking in deep losses.

Financial planners find themselves on the front line, attempting to keep investors on the straight and narrow. It is not an easy task.

Traditional investment advice such as "remain focused on the long-term" or to "ride it out" provide cold comfort when investors are watching their portfolios fall deep into negative territory.

While there is value in maintaining a long-term perspective, it often goes completely against people’s natural instincts and inherent biases during a bear market.

Many studies have shown that despite our best intentions, most investors don't listen to this advice. It is deep within our DNA, harking back to the earliest days of humankind, to focus on short-term survival and avoid losses.

Facts versus emotion

It's hard to focus on what a market downturn means personally when media headlines trumpet billions of dollars in losses. While nobody knows what markets will do next, applying the facts to personal situations is much easier and provides some much needed comfort.

Milliman was founded in 1947 as an actuarial firm and entered the Australian market more than a decade ago, providing research, advice and risk management techniques to institutions and advisers.

Our work has uncovered important insights based on real-world situations. Older investors in particular should be aware that:

• The government Age Pension is means tested, and so provides an automatic income buffer when retirement savings decline. This provides substantial value, as shown in the graph below¹.

Source: Milliman analysis

• Many retirees own their home, which has enormous untapped value. A retiree renting a one-bedroom unit in Sydney would require more than $500,000 in extra superannuation savings to fund the same lifestyle as a homeowner, according to Milliman research.
• Many retirees expect their investments to return more than the rate of inflation to meet their future lifestyle needs. A Milliman analysis of the real-world spending of more than 300,000 retirees has shown that spending declines sharply between the ages of 65 and 85.

Building better products

Many investors – and retirees in particular – were badly hurt during the GFC and are being hurt again as the coronavirus pandemic drags down economies and markets.

We know that retirees are particularly loss averse, but research also shows younger investors react poorly to market losses. The majority of Australians are risk averse by global standards, with 81% of investors under 35 seeking guaranteed or stable investment returns, according to the ASX 2017 Investor Survey.

Advisers have a deep relationship with their clients and understand the pain they go through during a downturn. Milliman’s products make life easier for advisers and their clients in markets of all kinds.

We know that volatile markets create challenges – that’s why we designed SmartShield. The managed account structure is built to work with traditional advice processes, allowing for quick and efficient responses to changing market conditions.

It is easy to explain to investors who are under pressure. When markets are more volatile, SmartShield's protection is automatically increased, providing peace of mind. When markets are less volatile, the level of protection is lowered, allowing investors to share in a potential market rebound.

Advisers can also use the risk management overlay tactically, switching it on and off as required without incurring capital gains tax.

Confidence and trust are fundamental to ensure clients feel confident and secure enough to stick with their long-term plans through a market downturn.

SmartShield can help build that foundation because it has been designed to work with how clients are, not how the investment industry wishes they were.

You can find more information about the Milliman SmartShield range at https://advice.milliman.com/en/smartshield.

Disclaimers

This document has been prepared by Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman AU) for provision to Australian financial services (AFS) licensees and their representatives, and for other persons who are wholesale clients under section 761G of the Corporations Act.

To the extent that this document may contain financial product advice, it is general advice only as it does not take into account the objectives, financial situation or needs of any particular person. Further, any such general advice does not relate to any particular financial product and is not intended to influence any person in making a decision in relation to a particular financial product. No remuneration (including a commission) or other benefit is received by Milliman AU or its associates in relation to any advice in this document apart from that which it would receive without giving such advice. No recommendation, opinion, offer, solicitation or advertisement to buy or sell any financial products or acquire any services of the type referred to or to adopt any particular investment strategy is made in this document to any person.

The information in relation to the types of financial products or services referred to in this document reflects the opinions of Milliman AU at the time the information is prepared and may not be representative of the views of Milliman, Inc., Milliman Financial Risk Management LLC, or any other company in the Milliman group (Milliman group). If AFS licensees or their representatives give any advice to their clients based on the information in this document they must take full responsibility for that advice having satisfied themselves as to the accuracy of the information and opinions expressed and must not expressly or impliedly attribute the advice or any part of it to Milliman AU or any other company in the Milliman group. Further, any person making an investment decision taking into account the information in this document must satisfy themselves as to the accuracy of the information and opinions expressed. Many of the types of products and services described or referred to in this document involve significant risks and may not be suitable for all investors. No advice in relation to products or services of the type referred to should be given or any decision made or transaction entered into based on the information in this document. Any disclosure document for particular financial products should be obtained from the provider of those products and read and all relevant risks must be fully understood and an independent determination made, after obtaining any required professional advice, that such financial products, services or transactions are appropriate having regard to the investor's objectives, financial situation or needs.

All investment involves risks. Any discussion of risks contained in this document with respect to any type of product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. Investing in foreign securities is subject to greater risks including: currency fluctuation, economic conditions, and different governmental and accounting standards. There are also risks associated with futures contracts. Futures contract positions may not provide an effective hedge because changes in futures contract prices may not track those of the securities they are intended to hedge. Futures create leverage, which can magnify the potential for gain or loss and, therefore, amplify the effects of market, which can significantly impact performance. There are also risks associated with investing in fixed income securities, including interest rate risk, and credit risk.

An investment in an underlying portfolio, whether with or without Milliman Managed Risk Strategy (MMRS) is subject to market and other risks and no guarantee or assurance is given by Milliman AU or any company in the Milliman group that the use of MMRS in connection with an underlying portfolio will not give rise to losses or that the performance of the MMRS in relation to the underlying portfolio will remove volatility completely or to the extent depicted in an illustration or fully replace losses in the underlying portfolio or to the extent depicted. While generally assets used in connection with the MMRS are liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to clients from the combination of an underlying portfolio and MMRS should be less than if a client had no MMRS.

Any source material included in this document has been sourced from providers that Milliman AU believe to be reliable from information available publicly or with consent of the provider of the source material. To the fullest extent permitted by law, no representation or warranty, express or implied is made by any company in the Milliman group as to the accuracy or completeness of the source material or any other information in this document.

Past performance information provided in this document is not indicative of future results and the illustrations are not intended to project or predict future investment returns.

Any index performance information is for illustrative purposes only, does not represent the performance of any actual investment or portfolio. It is not possible to invest directly in an index.

Any hypothetical, backtested data illustrated herein is for illustrative purposes only, and is not representative of any investment or product. RESULTS BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. For any hypothetical simulations illustrated, Milliman AU does not manage, control or influence the investment decisions in the underlying portfolio. The underlying portfolio in hypothetical simulations use historically reported returns of widely known indices. In certain cases where live index history is unavailable, the index methodology provided by the index may be used to extend return history. To the extent the index providers have included fees and expenses in their returns, this information will be reflected in the hypothetical performance.

¹Assumptions: a hypothetical 65-year-old couple who own their home and have $1 million in pension assets. Milliman's analysis values the age pension by discounting future means tested payments at modelled wage inflation to produce a current day value of those future payments. Other assumptions are equally possible and will give different values. There is also a range of alternative outcomes in payment amounts and values for this couple. The analysis shown focuses on the median (mid-point) of outcomes. In practice a wide range of alternative outcomes are modelled and possible for this couple.