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Adapt portfolio risk to reflect a realistic retirement time horizon
Most people will spend a significant proportion of their lives as retirees. ONS data suggests the average life expectancy at 65 is currently 18 years for men and 21 years for women and this is expected to continue to rise. Retirees should be able to continue to run a higher level of risk in their portfolios as they likely to be investing for a long period of time. Indeed we would argue that many will have to do so if they are to meet their retirement aspirations.
Diversify with purpose
Just as a balanced diet can be recommended for your health, a portfolio which harvests multiple return sources can be recommended for your financial well being. However diversification has to be with purpose – an asset has a role in a portfolio only if it has return or insurance potential.
Focus on valuation
A retirement investment strategy which is agnostic to the price paid is likely to be ineffective. To build wealth in a sustainable way over the long term you need to invest in assets when they are not expensive and then protect them from inflation. This is as true in retirement as at any other stage in life.
Retain a growth component for longer
To achieve an adequate pension, those who have saved an insufficient amount during their working life to fund the retirement lifestyle will have to maintain a growth component in their portfolio. The principle of money-weighted returns means that having that growth when the portfolio is larger will have much more impact – so the size of the portfolio and the sequence of returns matters too.
Be mindful of volatility when capital is being drawn down
The savvy do not conflate volatility with risk. They recognise that risk is more about the permanent loss of capital and that, although volatility is a legitimate component of risk, it can also represent opportunity. But, if capital is being drawn down, volatility that brings negative returns is a potentially mortal threat.
Factor in a longevity hedge
Given the uncertainties surrounding how long a person will live, there is a strong case for dealing with at least part of an individual’s mortality risk. An annuity is one obvious route but may not appeal due to the total loss of control over accumulated capital and poor protection from inflation. To deal with these needs, we would argue that savers (or at least their savings) need to maintain an exposure to growth assets for longer, while managing risk through techniques like diversification and volatility management. However, a longevity hedge may still be extremely reassuring, even essential, if savers are to retain trust in they way their savings are being managed.
