From The Experts:
Earn Income In Retirement

Balancing Capital Preservation and volatility in retirement investments.

For many retirees, preserving capital is usually a primary focus as they transition from growth-oriented investments to those providing more predictable income. At the same time, they must consider factors such as volatility, liquidity, and potential returns. Understanding how these elements interact—especially the role liquidity plays in driving volatility—can be helpful when selecting suitable investments, including property debt funds (also referred to as real estate credit funds).

A property debt fund is an investment vehicle that pools capital from investors to provide loans. The loans are backed by tangible property, providing a layer of security for the lender (or property debt fund) beacause the property can be sold if the borrower defaults on the loan. Property debt funds generate returns through the interest paid on the loans by the borrower.

Volatility: A Key Concern for Retirees

Volatility refers to how much an investment’s value can fluctuate in a given period. In retirement, high volatility may be a concern because retirees may rely on steady returns to support their day-to-day needs. Sudden drops in asset value could undermine this stability, especially if there is not enough time for the market to recover before withdrawals are needed.

Listed investments, such as those traded on the stock exchange, are typically more volatile than unlisted investments. The primary reason for higher levels of volatility is liquidity. Liquidity refers to how quickly an investment can be converted into cash.

On the other hand, unlisted investments like property debt funds do not trade on the stock exchange and thus are not subject to the same degree of liquidity-related volatility. Since investors cannot easily trade these assets, their value is less influenced by short-term market sentiment. This can result in more stable pricing and potentially lower volatility, when compared to listed investments, which may appeal to retirees seeking to preserve their capital.

Liquidity: A Double-Edged Sword

Liquidity refers to how quickly an asset can be converted into cash. With listed investments, investors can generally convert their investments into cash within a few business days. This high level of liquidity is attractive to some investors, but it also makes listed investments more vulnerable to price movements.

Property debt funds, by contrast, tend to have lower liquidity. They are secured by property, which cannot be readily converted to cash. Investors often need to commit their capital for a defined period before they can redeem their investment. This reduced liquidity means these investments are not subject to daily price movements, which means they are more stable than assets traded on the stock market.