Investment Portfolio Safety Drill

Don’t Let The Market Catch You Off Guard…

Back when I worked in an office they used to run fire drills throughout the year.  They generally came at the worst times and they would never tell you when they were going to happen.

You’d be in the middle of something important and this loud piercing sound would ring through the speakers.

Everyone would look at each other and ask whether this was for real or not.  Someone would go and check and see whether it was.

They’d come back and say it’s a drill, which really annoyed me like no end.  So, reluctantly I would follow the crowd to the meeting place, stand around for 10mins until the nominated warden said it was ok to return to the building.

As much as I hated these drills, there was a very good reason for these drills.

So everyone knew what do when and if a fire actually happened, that everyone knew what to do.

The benefits of such a drill are often overlooked.

You may be sitting there asking why I am talking about fire drills when you are a financial planner?

One very good reason.

We can apply the same logic on our investment/retirement portfolios.

One of the most overlooked areas for people preparing for retirement is assessing the risk they are currently taking and what they need to take to get the job done.

So, if you are someone considering retirement, just retiring or retired we are going to give you the process we implement for our clients that allow them to sail through market corrections with less worry and anxiety.

Before we get to that we have that all-important disclaimer.

This is not advice, I don’t know you, you don’t me or you might know me a little from these posts. 

I don’t know your personal circumstances and you should not take any advice from anyone that doesn’t know you.  That includes your family, friends, and mates at the pub.  They don’t know your circumstances.  

I only give advice to people I know, clients I work with where I know a lot about them by walking alongside them on their journey. 

If you are looking for advice and someone to walk that journey with you, feel free to book a call here to see if we are a fit.  Otherwise, seek the advice of financial professional or accountant before implementing any advice to make sure it’s right for you.  That’s only common sense.


 

Accumulation vs Decumulation

Planning for retirement generally comes in two distinct and different phases.

There’s the accumulation phase when you are working and accumulating your assets to fund your retirement.

Then there’s the decumulation phase.  This is when you start using the money you have saved over the years to fund your retirement lifestyle.

While you are working the amount of risk you take with your investments do not tend to worry us as much.

After all, you have your income to back you up.  So if you suffer losses in your investments, it’s not as big a deal, you have time to add to them and recover.

However, when you retire it’s a whole different story, no longer can you rely on your employment income to keep you going while markets recover.

In most instances, if this is not managed well you have to cut back on your lifestyle, you start to worry more and in some cases panic about whether your money is going to last.

It’s a little like comparing a rose garden to a veggie garden.

You attend to your roses through the years to keep them healthy and to produce great roses.  They are pretty to look at but you can’t eat them.  It’s akin to the accumulation phase of building your retirement nest egg.

In the decumulation phase, it’s more like a veggie patch.

You attend to your veggie patch, not just look at it and admire it like a rose garden.

A veggie patch is all about producing the food you can eat to survive.  It needs to deliver year in year out.

It’s no different than preparing for retirement.

Risky Markets

When investing for retirement you are not investing for one, two or ten years.  You are investing for 30yrs plus in most instances.

You are investing long-term, however, many people still think short term which is something that could cost you your retirement.

With the right strategy, the one we implement for all our clients will help you ROCK RETIREMENT!

While it’s tempting to place your funds in cash, it’s not going get you very far, the returns are poor and history suggests cash is not the place to invest your money long term.

But don’t worry we are going to cover off over the next couple of weeks ways to secure your retirement nest egg and manage through the ups and downs.

Achieving a solid return over cash means you need to accept the ups and downs of investment markets.  Call it the price of admission if you wish.

While good returns around your retirement will give you a positive experience.

The opposite, negative returns can be devastating in your retirement.  It’s what we call in the biz, sequencing risk…

Think back to the Global Financial Crisis in 2008, it’s most probably starting to seem a little fuzzy now.

If you were fully invested in Australia shares, the top was on Oct 1st, 2007 at 6779.10.

Just over 12mths later on Jan 3rd, 2009 the Australian market was sitting at 3,111.70.

That’s a massive drop off 54.10%.

So, if you had an investment portfolio worth $2,000,000, your portfolio would have dropped to $918,000.  How would you have felt, devastated I suspect?

While most would not have 100% invested in shares alone, you would have still experienced a substantial drop in your investments.

Although the markets recovered, they were scary and at some stages, they didn’t look like they were going to stop going down.

Many people midway through this market downturn cashed out their chips thinking if they didn’t they would lose it all.

Imagine you were retired at this stage and not had the right plan in place, I suspect it would have ruined your retirement plans.

We don’t want that for you.

Different Types Of Risk…

When we sit down with a client who is planning to retire, we spend a significant amount of time determining the risk they actually need to take to achieve their ideal retirement.

What they are willing to take or what the minimum dose of risk they need to take on to get them through.

We find those that are underfunded generally take less risk as they need the funds to last.  While those that are overfunded generally are willing to take on more risk as it’s more about succession for them, passing to the next generation.

In fact, we have introduced a new tool to assist clients to make this decision.  It allows them to play out certain scenarios to determine what they are really comfortable with.  We don’t believe the old risk profile questions cut in anymore.

They are designed to assess your maximum amount of risk you are willing to take.

Your responses to these questions will be dictated by your recent market experience.

So, if you’ve experienced a good run of investment returns recently you are likely to answer more favorably and therefore would be happy with more risk-taking.

However, if your recent experience has been a negative one your responses will lead to a more conservative approach.  One that may not be appropriate to achieve your ideal retirement.

In an era where retirees are living longer and lead a more active retirement a more dynamic approach to assessing the amount of risk is needed.

One that takes into account various scenarios that leads to a minimum amount of risk to get the job done.

So, what do we mean by all that?

Let’s look at the latest research from Vanguard which shows the potential amount of risk you may be exposing yourself too.

A portfolio that represented 10% in Bonds (conservative investments) & 90% in Shares (growth investments) you could potentially experience a maximum return of 62.4% and on the downside maximum loss of 34.9%.

On the other hand, if you had an investment portfolio of 50% in Bonds and 50% in Shares, the best return in any one year has been 44.7% and the worst return has been 21.7%.

What downside risk are you willing to take?

Let’s look at an example of how to apply this in practice…

Let’s take John & Sally.  They are about to transition to their ROCKING RETIREMENT lifestyle.

Between them, they have $1,500,000 in super.

They are needing $75,000pa  in income to meet their lifestyle needs.

We are keeping this example simple to illustrate the process of assessing risk.

John & Sally have come through a rather good period of investment returns and have not experienced any recent negative downturns.  John & Sally’s attitude towards risk is more to the aggressive side given their more recent investment market experience.

After assessing John and Sally’s comfort level their comfort level was 20% Bonds/80% Shares.   After running the numbers they have a rather good probability that they would be able to achieve their desired lifestyle.

On the upside, they could expect a maximum return in any one year of 62.4% & on the downside, they could expect a negative return of 34.9%.

Based on John & Sally’s total investment, they could expect a maximum increase of $936,000.  Their portfolio would go from $1,500,000 to $2,436.000.

However, on the downside, the story is very different. 

A negative 34.9% return would see a decrease in John & Sally’s retirement portfolio of $523,500.  John & Sally’s portfolio would have gone from $1,500,000 to $976,500.  This could be a devastating blow to their retirement lifestyle.

What I find with a lot of retirees I’ve worked with over the years, it’s no longer about getting the best return.

It’s about the ability to achieve everything they set out to achieve.  This is their measure of success, not the investment return.

The is where many get it wrong, but this part right and you are part way to protecting yourself from unforeseen investment markets.

While the above numbers are there to help guide us, we have no idea what the future holds.

However, a well thought out investment strategy will allow for an investment portfolio that will sustain most market corrections.

Finding the Balance!

The purpose of such a drill is to gain a better understanding of the risk you are taking with your investment portfolio.

However, it is also about finding the balance.  The balance between the amount of risk you need to take to live the lifestyle you want and what you are comfortable with.

For some of my clients, they wish to take on more than the minimum dosage of risk purely because of their level of assets or experience in investments markets.

While others prefer to only take the minimum dosage of investment risk to get the job done.

I hope you use this information to assist in managing the amount of risk you need to take vs what you currently take so you can go ROCK RETIREMENT!

Practical Planning…

  1. Obtain a copy of your super/account based pension/ investment that shows the allocation towards conservative investments and growth investments.
  2. Use the chart I’ve provided above to assess the amount of risk that currently exists in your portfolio.

Hope that’s been useful!!

NEXT WEEK, we will be going through step 2, rebalancing your investment portfolio.

Now, go ROCK this…

NEED SOME HELP?

If you’re someone who is up to 15 years away from retirement.   You plan on being self-funded. You have accumulated some assets and want some help in figuring this stuff out.  Feel free to book in a 15 min Rock Retirement call here>>> and we can help you work out what that first step is for you, what you need to focus on to fast track your progress.

I’ll be honest here, we won’t do your pushups for you.   But if you are motivated for the right reasons we can save you a lot of time and heartache.  We can save you from the mistakes most people make to fast track your way to a ROCKING RETIREMENT.

Ps. We don’t sell you anything on this call.  We will help you determine what the next step is for you.  However, if you are someone who is looking for a get rich scheme, silver bullet or believe you know everything we are not for you. If you are someone who really wants to achieve financial freedom, committed and wants to work collaboratively then we can help.

Hope that’s been useful.

 

Know someone that would gain benefit from the information, feel free to forward on.

Glenn

Make it a great Life!

Challenging the Status Quo!

Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth

Website: jigsawprivatewealth.com.au

Email: [email protected]

Mob: 0401 253 729

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 June 2018. This is an online information blog. It does not imply an offering of securities.