Following a period of economic disruption and now uncertainty over the long-term impact, this is a good time to reflect on your investment strategy for retirement.
We’ve all come across the fable of the Tortoise and the Hare and the moral of the story is clear and powerful—ultimately, one can often be more successful by doing things slowly and steadily than by acting quickly and without forethought.
Whether it’s personal safety, career progression, or indeed marathon training, this really is sound advice. One area where the message of Aesop’s best-known tale is particularly pertinent right now is in that of retirement planning.
In fact, in this period of extreme and ongoing economic volatility, being a tortoise rather than a hare could very well provide those relying on their pension pots indefinitely with more of a safety net than ever.
There has been, and continues to be, an extreme level of economic uncertainty worldwide over the last few years.
Here in the UK, Covid is regrettably still very much with us. We hope the extremes of lockdowns and dramatic market turbulence will not be repeated but the general consensus is that we’re by no means out of the woods yet.
After all, propping up Britain’s economy through a prolonged period of ultra-low domestic expenditure and furlough has required huge amounts of fiscal and monetary stimulus from the government. Now the recovery has begun, we’re starting to see the effects of this intervention play out—not only in the form of rising inflation but also some significant tax increases.
Commentators remain split on what will happen over the longer term, but many notably speculate that these sorts of factors will hold back parts of the UK for many years to come.
And that’s before we even factor in Brexit—which continues to shroud many areas of the economy in uncertainty. Not to mention the fact that, beyond Britain, the rest of the world is also recovering from (or, perhaps, struggling to recover from) Covid conundrums.
Put it all together and it’s hard to see where the next good news is coming from.
In many of these cases the potential doom and gloom is just that—a risk. However—to introduce a third animal into the equation—the elephant in the room continues to be the fact that each factor presents a very real threat to the value of our investments and the money in our pockets.
For those who are younger, the opportunity to make outsized returns amid a strong and ongoing global economic recovery is, arguably, both extremely attractive and highly feasible. After all, the reality of decades of ongoing employment offers both a cash safety net in the present and the opportunity to recover from any major losses moving forward.
Such are the core benefits of being in the accumulation phase of one’s life.
But for those who are closer to retirement, and perhaps not blessed with decades of employment income ahead of them, the risk/reward profile is far more profound. And this—at the risk of labouring the metaphor too heavily—is where the approach of the tortoise stands to be far superior.
Slow and steady wins the race
The focus for those relying on their savings pots for the foreseeable future should be less on life-changing returns and more on making what is already there working hard on their behalf for as long as possible.
Of course, putting higher risk on the table will always be tempting—in the right circumstances it could even leave a retiree in the best financial circumstances of their lives. But the problem is, in the absence of a regular stream of complementary employment income, one can be left extremely exposed if markets collapse and the bet doesn’t pay off. After all, we’ve all seen it happen before in the not too distant past.
The alternative and more considered approach, then, is to aim for “cash-plus” returns.
One of the most effective ways of achieving this is by diversifying one’s holdings across a wide range of near-cash and low-risk assets—perhaps via one of the many multi-asset funds on the markets.
And fundamentally, it puts decumulation investors in a win-win scenario:
On the one hand, they stand to generate enough return to beat inflation and even possibly replenish the value of their regular income withdrawals. On the other hand, they are also able to achieve all this while exposing their overall pot itself to far less risk.
It’s a method centred around wealth preservation rather than wealth creation.
While it means investors won’t experience the full upside of a bull market, instead providing more modest positive returns in such periods, it also ensures that their downside risk is minimised when the opposite happens and those same products take a hit, thus smoothing returns over the longer term.
For those who need their money to work for them as long as possible, it is important to find the right balance of risk and reward. Indeed, if we return to the fable at the beginning of this piece for a moment, it’s very clear that—when it comes to investing for retirement —the slow and steady approach of the tortoise will not only get investors over the line, they’ll be able to enjoy a victory glass of bubbly post-race.
The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.