Abstract
This paper examines the role of commodity-related investments in the decumulation phase of retirement. Benchmarked against a balanced portfolio, the findings suggest that including commodities in a traditional portfolio improves the retirement outcomes at the lowest percentiles of wealth distribution. Furthermore, we demonstrate that downside protection is more pronounced by reducing allocation to equities (rather than bonds) to invest in alternatives. An equally weighted combination of passive and active commodity-related investments provides superior downside protection compared to a traditional portfolio at all levels of allocations used in the analysis. As a consequence, commodities may be employed as a portfolio diversification tool particularly in the decumulation phase of retirement. Keywords: alternatives, commodities, life cycle, superannuation, retirement. JEL Classification: G11, G23
Highlights
Literature reviewIn the retirement literature, existing research has mainly focussed on developing well-diversified and sustainable investment portfolios during the working life of individuals (Basu and Drew, 2009; Milevsky, 1998)
This paper examines the role of commodity-related investments in the decumulation phase of the retirement portfolio
An weighted combination of the two commodity-related investments provides superior downside protection compared to a traditional portfolio at all levels of allocations used in the analysis
Summary
In the retirement literature, existing research has mainly focussed on developing well-diversified and sustainable investment portfolios during the working life of individuals (Basu and Drew, 2009; Milevsky, 1998). Increasing life expectancy highlights the importance of optimal investment strategies and the need for adequate measures to cater for elongated retirement periods (Krumholz et al, 2015; Blake et al, 2006). It is important in retirement that individuals take active measures to ensure that they do not outlive their available wealth. These include decisions regarding asset allocations, portfolio drawdown plans and longevity management. The onus lies on the retiree to manage her risks in retirement, there is the benefit of government sponsored pensions in countries such as Australia
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