One of the most common questions investors face as they move through different stages of life is when – and how – to adjust their portfolio from a focus on growth to a focus on capital preservation. In practical terms, this often means considering a transition from growth-oriented exchange traded funds (ETFs) to capital-preservation ETFs.
This shift matters because the goals of investing evolve. While younger investors tend to focus on building wealth, those approaching or entering retirement usually want to protect what they’ve built. The challenge is that there’s no one-size-fits-all answer. Instead, there are principles and frameworks that can help investors think through this important transition and weigh the trade-offs.
What are growth ETFs?
Growth ETFs are funds that primarily invest in assets with high potential for long-term capital appreciation. They tend to be equity-heavy, meaning they hold shares of companies – sometimes entire markets, sometimes particular sectors.
Key characteristics of growth ETFs include:
- Equity-focused: Holdings are largely in shares, which historically provide higher returns but also higher volatility.
- Potential for compounding: Over decades, reinvested dividends and market growth can significantly grow wealth.
- Exposure to risk: Markets can swing widely, and investors must be prepared to weather downturns.
Examples of growth ETFs include:
- Broad-market equity ETFs (e.g., ASX200 or S&P500 trackers).
- Thematic ETFs (e.g., technology, clean energy, healthcare).
Growth ETFs are typically used during the wealth accumulation phase. A 35-year-old saving for retirement, for instance, may have 20–30 years to ride out market fluctuations. Short-term volatility is less relevant if the investment horizon is long, making growth ETFs well suited to this stage.
What are capital-preservation ETFs?
Capital-preservation ETFs, sometimes called defensive ETFs, are designed to safeguard the value of an investor’s portfolio. They typically invest in lower-risk assets such as government bonds, high-grade corporate bonds, or cash-like instruments.
Key characteristics of capital-preservation ETFs inlcude:
- Lower risk, lower returns: These ETFs generally aim to protect principal while providing modest, stable returns.
- Reduced volatility: Bond and cash holdings are less volatile than equities, smoothing the overall ride.
- Income generation: Some preservation ETFs focus on providing regular interest payments rather than growth.
Examples of capital-preservation ETFs include:
- Australian government bond ETFs .
- Global aggregate bond ETFs.
- Cash or ultra-short duration bond ETFs.
Such ETFs are often used in the r etirement drawdown phase. For example, a 65-year-old who begins drawing down from superannuation may prefer stability and income over the risk of sharp equity market falls.
Why transition at all?
The rationale for transitioning comes down to the natural lifecycle of investing:
- Accumulation phase: Building wealth through growth-oriented investments.
- Preservation phase: Protecting accumulated wealth as retirement nears.
- Drawdown phase: Withdrawing from investments to cover living expenses.
A critical factor here is sequence-of-returns risk. This is the risk that poor market returns in the early years of retirement can have an outsized negative impact because retirees are withdrawing funds at the same time as markets are falling.
For example, two retirees with identical portfolios and long-term returns may end up with very different outcomes depending on whether markets perform poorly in the first few years of retirement. Capital-preservation ETFs may help mitigate this by reducing exposure to volatility.
There’s also the psychological dimension. Knowing that your retirement savings are less vulnerable to sudden downturns can provide peace of mind, making it easier to stick to a long-term plan.
Factors influencing timing
So, when should an investor consider making the transition? Several factors commonly play a role:
- Age and time horizon: As investors approach retirement, the priority often shifts from growth to stability. Someone 10 years away from retirement may still favour growth, whereas someone already retired may need more preservation.
- Risk tolerance: Investors who find market volatility stressful may want to transition earlier, while those comfortable with risk may maintain growth exposure for longer.
- Income needs: Retirees relying on their portfolio for living expenses may prioritise preservation to ensure consistent withdrawals.
- Market conditions: While we don't believe in trying to time the market , broader conditions such as high equity valuations or attractive bond yields may influence the pace of transition.
How transitions typically happen
Transitions don’t need to be sudden. Many investors move gradually, shifting allocations over time.
Common approaches:
- Gradual rebalancing: Slowly adjusting the mix of growth and preservation assets (e.g., moving from 80% equities and 20% bonds, to 60/40, to 40/60 as retirement nears).
- Glide paths: Used in lifecycle or target-date funds, where asset allocations automatically shift toward defensive assets as retirement approaches.
- Blended ETFs: Balanced or diversified ETFs combine equities and bonds in a single fund, offering a middle ground without needing to manage the allocation manually.
For example, an investor in their late 40s may hold 80% growth ETFs and 20% preservation ETFs. By their mid-60s, that mix may have shifted closer to 40% growth and 60% preservation.
Trade-offs to be aware of
Transitioning to capital-preservation ETFs can come with clear benefits, but there are also trade-offs that need consideration.
- Lower growth potential: Reducing equities limits the portfolio’s ability to grow, which can be a risk if retirement lasts 20–30 years.
- Inflation risk: Bonds and cash may not keep pace with rising costs of living, which can erode purchasing power.
- Opportunity cost: By moving away from equities, investors may miss out on strong market rallies.
- Peace of mind: On the other hand, stability can be worth the trade-off for those who value predictability over maximising returns.
Diversification remains key. Even in a preservation-focused portfolio, holding a mix of asset types can help manage risks.
Tools and frameworks investors can use
For those wondering how to apply these principles, there are several tools and resources that can provide clarity:
- Risk profile questionnaires: These are offered by many financial institutions and help assess how much risk an investor is comfortable with.
- Superannuation lifecycle options: Some super funds automatically adjust asset allocation as retirement nears, reducing the need for manual changes.
- Model portfolios and robo-advisors: These can serve as references to see how different allocations are structured at various life stages.
- Cash flow planning: Mapping out expected expenses in retirement can help determine how much stability versus growth is needed.
Conclusion
The decision to transition from growth to capital-preservation ETFs is less about following a fixed rule and more about aligning investments with personal goals, time horizons, and comfort with risk.
Growth ETFs may excel during the wealth accumulation phase, while capital-preservation ETFs can help protect savings and support drawdowns in retirement. The timing of the transition depends on individual circumstances, from age and risk tolerance to income needs and psychological comfort.
Ultimately, investors should view this not as a one-off decision but as part of an ongoing journey – regularly reassessing whether their ETF strategy continues to match their stage of life.
Happy investing!
