Fiddler's elbow: Why retirees need to invest differently
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In the past six months, we have seen investment highs and lows like never before. The initial shock of the coronavirus really spooked investors. It caused Australian share markets to fall 37% in just 31 days. Markets in the United States dropped 34% during the same period.
Up and down like a fiddler’s elbow
But then something strange happened. As quickly as the markets fell, they bounced back again. Almost to their previous highs. It’s been the sharpest return of markets that we’ve ever seen.
According to Chant West the median return for an Australian ‘balanced’ super fund was only slightly negative (-0.5%) for the year to end June 2020.
That’s great news for retirees who managed to stay the course. Unless you are one of the thousands of Australian investors who switched to cash, your nest egg should still be largely intact.
A time for caution
But the outlook is still highly uncertain. In fact, there’s never been a period with so much uncertainty about the future. We don’t know the extent of the COVID healthcare crisis, or its social and economic impacts in the short, medium or longer terms.
Investors and markets hate uncertainty. During periods of uncertainty, investor sentiment drives asset prices, not investment fundamentals. And sentiment is flighty. It means that for the foreseeable future markets will be volatile. Asset prices will fluctuate wildly as investors react and over-react to every piece of news, good and bad.
That’s fine if you’re young and building up your nest egg. In fact, the dips in prices create buying opportunities for long-term accumulators. But they don’t for retirees. Market falls represent only risk for retirees, and they need to be guarded against.
Retirement is different
That’s because retirees are not just long-term investors, they’re short-term investors too. They need to live off their retirement savings. During periods of low interest rates, there’s no chance of living purely off the yield of your investments. There won’t be enough.
It means you need to sell down your investments to give you money to live on.
Retirees need a way of systematically selling their investments at the right time. They need to avoid selling down their investments when markets are dropping, because selling assets at depressed prices destroys wealth. At the same time, they want to lock in profits when they arise.
A framework can solve this
At When Financial Solutions we employ an investment framework that can solve this challenge for retirees. First, we seek to understand your lifestyle goals; how much money you will need and when you will need it.
We then invest your money to meet your specific ambitions. It’s called ‘asset - liability matching’.
We set aside a few years of money to fund your short-term needs, making sure we fund for any earmarked capital expenditure. We invest the rest cost efficiently with broad allocation to give you the diversification you need over the long-run.
Then in the context of an active professional relationship, we judiciously rebalance your investments from time to time. We replenish your short-term holdings so that you can fund your lifestyle, while taking care not to sell your assets at the wrong time.
Markets may be unpredictable for the foreseeable future, but you can still control the important things. With When Financial Solutions it’s not a matter of ‘if’ you will have confidence in your retirement investments but ‘when’.
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances. If you would like advice specific to you please give us a call.