Decumulation and Volatility: Advisors’ Focus as Clients Approach Retirement
April 18, 2017
Volatility can be the investor’s friend in the accumulation phase, and drawdowns can be the price of long-term appreciation. In the withdrawal phase, however, large drawdowns can permanently impair the portfolio’s ability to generate income as shares are liquidated to deliver that income are removed.
Reducing portfolio variance and drawdowns can be more critical than ever in the withdrawal phase even while your clients need growth potential from equities.
And so it’s in the decumulation stage where consultant Keith Van Etten of Van Etten Consulting, Inc. sees financial advisors increasingly turn to liquid alternative mutual funds.
“After having focused on the accumulation stage for so many years, advisors are realizing that decumulation involves a set of different considerations—sequencing of returns and managing drawdowns just to name two. They’re turning to alternatives to better manage the risks of running out of money in retirement,” says Van Etten.
The following hypothetical illustration shows how the adjustment of a traditional 60%/40% portfolio to include an equity long/short strategy may play a role in a distribution portfolio. Higher risk-adjusted returns versus the market over a full market cycle can mitigate the market’s more extreme returns (both high and low). And, lower overall volatility in an equity portfolio may reduce the prospect of emotional reactions during market pullbacks.
All three of these sample portfolios were successful at sustaining income over the full period and all had a positive ending term value.
However, reducing the portfolio’s volatility, including drawdowns, had a significant impact during the withdrawal phase. The risk metrics improved proportionately and the Sharpe ratio also improved.
Financial advisors, for more information about using a long/short equity strategy to minimize drawdowns in the distribution stage, talk to your Calamos Investment Consultant about Calamos Phineus Long/Short Fund. He or she can be reached at 888-571-2567 or [email protected].
For more on Calamos’ approach to volatility, see our just-updated Volatility Opportunity Guide.