With a buffet of investments available, how do you choose which ones to invest in?
Do you go for the healthy low risk options? Or take a risk and go for the sugary options. The ones which will give you a high and come crashing down as the high wears off.
When thinking about the investments you use, it’s important to remember:
“On average, 90% of the variability of returns is explained by asset allocation.” Roger G. Ibbotson
With all the ups and downs of investment markets. With a vast array of investment options.
The majority of your investment return will come from the way you allocate your money. The way you divide your portfolio between cash, interest bearing, local shares, international shares and property.
The staples of any good investment portfolio:
Cash: It’s Not As Safe As You Think
We advocate cash for the right reasons. But unless you have a bucket load of money, cash is not the place to leave your nest egg.
“The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about “cash is king” and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time.” Warren Buffett
While most think of shares, commodities, real estate and virtual coins as being risky. Cash can also be put in the same basket.
Take a look at the long term returns. Some of the worst of all the asset classes.
The biggest risk to holding too much cash is losing your purchasing power. Inflation eats away at your cash returns. Diminishing your purchasing power in future years.
You must get the balance right!
Leading into retirement. It’s important to have enough cash to cover emergencies, upcoming capital expenses. While allowing for a couple years worth of income payments.
Hoarding cash for long periods is not.
Bonds: It’s a loan to a government, bank or a business
It doesn’t need to be more complicated than that.
By purchasing bonds, you are making a loan to someone. Whether it be the government, bank or businesses.
In return for lending your money, you receive a set interest rate in return.
The more risky the higher the return.
You buy a bond for a set amount, let’s say $100. Receive an interest rate of 3%. In five years time you’ll receive $100 back plus the interest for that period of time.
Let’s say, new bonds are issued and the interest rate is now 4%. If you hold your bond until maturity you’ll receive your full $100 back.
Should you decide to sell before maturity, it’s likely your $100 bond will be less than $100. That’s due to investors being able to receive a higher rate for the newer bonds.
The opposite can also happen.
If interest rates drop below the rate you are being paid. The price of your bond will go up as investors are able to receive a higher rate. Thus creating higher demand.
Bonds are less riskier that shares or property.
They form the conservative part of your portfolio.
It’s a little like being on a kiddies ride compared to a roller coaster. You’ll bump around a little but you’ll be fine.
Shares: Investing in a business
Contrary to what some think. When you buy a share, you are an investor in a business.
If you listen to the media, they’d think you were punting in a casino.
This is simply not the case.
Think about the goods and services you buy. Behind every good and service you purchase is a business.
Iphones – Apple
Groceries – Woolworths
Pay TV – Netflix
Historically, shares have earnt an average return of between 8-10% pa.
However, given the current environment and the growth of world share markets. It’s likely you’ll experience lower returns in the future.
They tend to be the most volatile. Shares have at times dropped in value 20%, 30% and even 50% every couple of years or so.
In fact shares are generally up 58% of the time and down 48% of time.
Exactly why we wouldn’t recommend putting all your money in shares if you are close to or transitioning into retirement.
Sure you want to have a proportion of your retirement assets in shares but not all of it. But don’t forget, investing for retirement is all about managing your risk.
Real Estate – Good old bricks and mortar
Australian’s have a bond with bricks and mortar. You must think of real estate like any other investment.
Over the long term they generate good returns, but can fluctuate in value as well.
You can invest in real estate through the purchase of rental properties and for some commercial properties. But this does need a relatively large outlay.
Or, you can simply invest in real estate via REITs (real estate investment trusts).
REITs invest in commercial buildings, industrial buildings, offices and shopping centers. Those that produce an income.
As the majority are listed on the ASX, you are able to purchase them like a share. You participate in the growth and income of that trust.
Rather than holding one or two investment properties. REITs can invest in hundreds of properties. Providing good diversification.
One of the advantages of REITs is rental income increases are tied to inflation. Thus you’d expect your income to go up every year.
Like any other asset. Holding REITs in your portfolio allows you to diversify further and spread your risk.
Commodities – You hold it but it doesn’t generate income!
Raw materials which come out of the ground. Think gold, silver, copper, oil and energy to name a few.
Commodities can be bought and sold, but rarely generate an income.
They are highly volatile.
Take gold for example. People generally buy gold when economies look shaky. They think it’s a safe investment.
But successfully investing in gold requires real skill.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow.
“As “bandwagon” investors join any party, they create their own truth – for a while.” Warren Buffett
Remember in short periods gold can outperform. It has no intrinsic value and underperforms stocks over the long term.
Commodities is not a place you want to invest your retirement funds. It’s best left to the speculators.
Alternative investments – You could make up your own definition here!
Alternative investments could span many different options. It’s just a different way to invest in the main options such as shares and property.
Let’s look at a couple of alternatives:
Available generally to private investors. Require minimum levels to invest. The provider can, if they want, close the fund at any time.
For the most part, these funds engage in an expansive range of activities.
Overall they are event driven. Trying to take advantage of world events like oil wars, wars, economic events. While others are betting on the market going up or the market going down.
Invest in these types of investments at your own peril.
Back when I was a little naïve. Before the global financial crisis. We were sold on one type of fund. Made sense on all levels.
As the global financial crisis took hold. The investment we thought would deliver the goods, started to fail. Luckily we got everyone out before they closed the doors on redemptions.
Subsequently the fund lost most of its value. Never again will we invest in such investments.
Even the great Warren Buffett took on a bet with the cream of the crop Wall Street Hedge Fund managers. Beat the S & P 500 over a 10 year period and he would donate $1m (yes $1 million big ones) to their favourite charity.
The result! Over the 10 year period, the hedge fund manager generated an average return of 2.2%. Buffett won the bet. The S & P 500 averaged 7.1% over the same period.
💡Lesson: These investments will make someone rich, but it’s unlikely to be you.
In a lot of cases these types of funds are only available to the top end of town. Require large initial investments.
For the most part, your money is invested for a set period of time.
They invest in private companies (not listed on share markets). They’ll buy the whole company or invest in a portion.
They are betting on the growth of the company.
At some stage they expect to sell out for a profit or list on a stock exchange.
Some of these types of investments will invest in many companies, spreading their risk. With the knowledge most will fail. But there will be one or two that will win big time.
Cryptocurrencies – The surgery sweet to give you a high but watch for the low
Everyone’s an expert and this is the new shiny object.
With people betting their financial futures on it, it’s already raising alarm bells.
Build on the back of Blockchain technology. A digital currency. That doesn’t require a third party to verify the funds are in a bank account.
Don’t get me wrong, Blockchain is a technology that’s here to stay. And possibly the likes of Bitcoin but it’s like any other currency. It doesn’t run a business nor does it generate an income.
Warren Buffett said “I can say almost with certainty that cryptocurrency will come to a bad end.”
I’ve also heard a comment from a well respected investment guru, saying there will be many bodies left in the wake of crypto currencies.
Here’s the thing, it was invented by someone or some organisation called Satishi Nakamoto. To this date I don’t believe anyone knows whether this is a person or an organisation. That’s a concern in itself.
While I don’t believe in holding this type of investment in your retirement portfolio. It’s too volatile for that.
It’s purely a speculative investment.
Yet, there will be some who want to take a punt. If that’s the case. Allocate a very small proportion of your overall wealth to it.
But, be prepared to lose it…
Timeless Investing Lessons For All Pre-retirees and Retirees:
Turning to David Booth, a 4o year veteran and founder of Dimensional. Linked to Nobel laureates, researched backed investing.
Learning from his wisdom and lessons we advocate for every client.
#1 Investing is not Gambling and Gambling is not investing
Going to a casino and taking a punt is short term in nature and is gambling.
Trying to time the bottom and the top of the market is gambling. Research shows time and time again it’s nigh on impossible to pick investment markets.
Investing is holding investments for long term.
Using diversification as your friend. Understanding that as a investor there are things you can do to manage risk and be prepared.
#2 Uncertainty’s Here To Stay; Embrace Uncertainty
In over a 100 years there have been many events which have rocked our world. Share markets have crashed and scaled great heights.
Uncertainty, unfortunately is part of everyday life.
The best way to embrace uncertainty is to be prepared.
The odds are you in favour if you prepare well and have a plan for getting back on track. Rather than jumping ship at the first site of panic.
#3 It’s All In The Implementation
It’s great having all the information. But if you don’t implement it, it’s worthless.
Decisiveness and implementation is the key with any successful retirement plan. Sometimes, you just need to get out of your own way.
ALSO READ: 3 Steps To An Unbreakable Retirement Plan
#4 Dial Down The Noise
As humans, our brains have not had a upgrade. Research after research studies shows as humans we are not good at making good financial decisions.
Too often, emotion gets in the way.
Only invest in what you understand.
Don’t try and time investment markets. If professionals fail to do this, what makes you think you can?
Good news! You can still do well if you have a solid plan, avoid common mistakes and have a little more metal between you and the outside world.
#5 What’s Your Investment Philosophy
Investing does require skill.
Successful investing over time requires patience and unwavering discipline.
When investment markets are having a tantrum, it’s had to stay the course.
But, if you embrace uncertainty, tame your emotions you can focus on the things you can control.
Discipline over time can be a major contributor to living your best life in retirement. This is where a professional can help you stay the course.
Is it time you had a chat with your future self?
Do you know how your retirement path could pan out?
If you want to keep the good times rolling in retirement, book your Retirement Breakthrough Session here. This session is designed to help you work out how your financial future could pan out. Identifying your risks and opportunities so you can make informed financial decisions and achieve more confidence in your retirement plan.
Here’s your opportunity to book your complimentary Retirement Breakthrough Session here.
Glenn Doherty – CFP – Retirement Planning Specialist | Retirement Planning made simple for over 55 white collar professionals
We conduct virtual client meetings!
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at April 2021. This is an online information blog. It does not imply an offering of securities.