Opinion: It's time to adapt to changing world of investment
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Chatting on the phone earlier this week with Andy, a mate of many years’ standing and investment director at a well-known fund management company, our conversation followed its regular, well-worn route.
First topic: football. It’s been a particularly painful time for my team recently (no sympathy there, though), whereas Andy’s side have enjoyed a remarkable turnaround since recruiting a new manager a few months ago. “We’ll be playing you in the top flight next season,” he declared – a bold, confident prediction from a man used to making bold decisions.
Second topic: family. Wife and kids ok? Yep.
Third topic: stock markets. I always appreciate listening to Andy’s insight, not least because he has worked in fund management for more than 30 years across three different continents.
I mentioned that the ‘R’ word (retirement) has recently become part of my everyday lexicon as I moved to within a decade of calling it a day, work-wise. Accordingly, I’ve been considering when it might be opportune to start shifting a proportion of pension and ISA investments into bonds to give the portfolios a greater focus upon income.
For years, conventional investment theory has maintained that as the prospect of retirement appears on the horizon, so we should move investments away from stocks and shares because they’re deemed riskier assets and into bonds and other, ‘safer’, income-producing investments.
Concurrence with this strategy was not as effusive as I had anticipated.
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“The days when you could draw an annual income of 4% from your pension without fearing your money would run out are long gone,” explained Andy. “The ‘problem’ for millions of Baby Boomers like us is life expectancy. We’re the lucky generation in more than one sense because most of us can expect to live into our eighties and even nineties,” he added.
He made two convincing points: the first was that Boomers fortunate enough to reach their mid-sixties have a strong chance of living for at least another two or three decades. This means that even at the traditional retirement age of 65, people should have at least half “and probably closer to 60%” of their pension pot in stocks and shares.
Second, although we haven’t encountered it to any great degree for years, it is vital that our retirement pots take account of inflation. For this reason, my good friend suggested that only around one fifth (“probably a little less”) should be in bonds.
Government bonds have traditionally acted as the cornerstone of many retirement pots for two reasons: they’re safe and the income, or yield, they produce, though modest, acts as a base upon which income from other sources can build.
However, government bond yields have been falling as their prices have risen over the past 12 months, a combination which has resulted in investors looking elsewhere for income, often towards a contracting pool of shares in companies still rewarding shareholders with reasonable dividends.
The risk associated with such a strategy became starkly evident last year when hundreds of companies, previously renowned for paying higher dividends, either reduced or cut them altogether. Retired people, partly dependent upon regular dividend payments for their income, suffered as a result.
In other words, as life expectancy levels have risen dramatically over the past 40 years, continuing to pursue a bond / income-only retirement strategy effectively exposes investors to unnecessary risks. This is especially the case if the strategy is adopted at a relatively early age, ie from 65 onwards, because the pool of reliable income-producing assets is shrinking.
It’s not just Andy who takes this view. According to a burgeoning number of fund managers and advisers, it could be more advantageous for those approaching retirement to retain a sizeable percentage of their savings either directly in companies that have the potential for impressive rates of longer-term growth, or in funds with a specific ‘growth’ mandate.
Earlier this week, online stockbroker Freetrade noted that the most popular growth stock among those aged over 50 was Tesla, the ubiquitous electric car manufacturer; among the most popular funds preferred by the same age group was the Scottish Mortgage Investment Trust.
Yet even adopting a slightly riskier retirement strategy is no guarantee of success and could require a strong constitution; over the past month, shares in Scottish Mortgage have fallen by more than 18%.
Nevertheless, it would appear that as the world has changed since the end of 2019, so too have traditional approaches toward investment. As we’re likely to bombarded by ISA-related advertising over the next three weeks, it could be worth discussing your strategy with a financial adviser.
THE WEEK IN NUMBERS
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Isn’t retirement for fun? Read Peter Sharkey’s blog exclusively at www.moneymapp.com/blog