Retirees' strategies for coping with negative markets
In last month’s column, I discussed the impact that falling markets can have on those clients who are in the saving phase of their lives. I concluded, somewhat surprisingly, that for clients who are disciplined and invest in a certain way, negative markets can help build wealth.
Although this conclusion is valid for half of the population (i.e. those in the wealth accumulation phase of their lives), what about those clients who are retired and looking to receive a sustainable level of drawings to help fund their living costs?
The simple answer is that for retired people, a falling market environment has to be endured rather than benefited from. It is a time when the way a portfolio is ‘engineered’ will become a critical determinant of whether the strategy will be able to sustain the same level of drawings when markets turn negative.
Don’t cut down half-grown trees.
For retired clients, the way in which the portfolio is constructed has a lot in common with a diversified farming operation. Within a farm there will generally be a number of different crops grown. Each crop represents a different future income stream and will often have a different maturity timeframe. The same logic can be applied to the construction of a retirement investment portfolio.
The cash component of a client’s portfolio is the short-rotation, low-yield, stable return crop. It is the part that will meet a client’s income needs over the short-term; however, it will need to be ‘re-seeded’ from other capital from within the portfolio as it will be consumed over time. Fixed interest and bonds are your mid-term crops. These will tend to have longer rotations but will also generate higher returns than cash. These mid-term crops are complemented and supported by longer-rotation crops. In an investment context, this is your property and share exposure.
In negative market conditions, it is critical that you are not forced to sell undervalued assets to buy the weekly groceries. This would be as absurd as a farmer cutting down a half-grown radiata pine plantation to provide short-term cashflow. If you had to do it, you would - but it is only going to generate a fraction of the value in comparison to holding that crop to maturity. In the investment world, this approach to the construction of a portfolio is known as Goals Based investment, and is a method I advocate for most of my retiree clients.
Don’t be tempted into over-investing in one asset class.
The rate of technical disruption that we are facing in our society is staggering. At the moment, we are seeing the impact that the internet is having on high street retailers and this is just one example. Who the winners and losers of any given technology might be, and what the impact that will have on asset prices, is incredibly difficult to gauge.
Yes, there will be new exciting investment opportunities, but are you the best person to pick these? On the flip side, there will also be investments that are currently considered ‘rock solid’ which will turn out to be less valuable and in some cases next to worthless.
It might sound a little boring, but in the face of such change, holding a well-diversified, highly liquid portfolio of cash, bonds, property and shares is your best defence.
Retirement is not the time to take a ‘double or quits’ approach to your investment strategy by investing in a single asset class, or - even worse - a single asset within that asset class.
There is much more that can be said about this topic, but in summary, my retiree’s guide to cope with a negative market environment has three elements...
Although this conclusion is valid for half of the population (i.e. those in the wealth accumulation phase of their lives), what about those clients who are retired and looking to receive a sustainable level of drawings to help fund their living costs?
The simple answer is that for retired people, a falling market environment has to be endured rather than benefited from. It is a time when the way a portfolio is ‘engineered’ will become a critical determinant of whether the strategy will be able to sustain the same level of drawings when markets turn negative.
Don’t cut down half-grown trees.
For retired clients, the way in which the portfolio is constructed has a lot in common with a diversified farming operation. Within a farm there will generally be a number of different crops grown. Each crop represents a different future income stream and will often have a different maturity timeframe. The same logic can be applied to the construction of a retirement investment portfolio.
The cash component of a client’s portfolio is the short-rotation, low-yield, stable return crop. It is the part that will meet a client’s income needs over the short-term; however, it will need to be ‘re-seeded’ from other capital from within the portfolio as it will be consumed over time. Fixed interest and bonds are your mid-term crops. These will tend to have longer rotations but will also generate higher returns than cash. These mid-term crops are complemented and supported by longer-rotation crops. In an investment context, this is your property and share exposure.
In negative market conditions, it is critical that you are not forced to sell undervalued assets to buy the weekly groceries. This would be as absurd as a farmer cutting down a half-grown radiata pine plantation to provide short-term cashflow. If you had to do it, you would - but it is only going to generate a fraction of the value in comparison to holding that crop to maturity. In the investment world, this approach to the construction of a portfolio is known as Goals Based investment, and is a method I advocate for most of my retiree clients.
Don’t be tempted into over-investing in one asset class.
The rate of technical disruption that we are facing in our society is staggering. At the moment, we are seeing the impact that the internet is having on high street retailers and this is just one example. Who the winners and losers of any given technology might be, and what the impact that will have on asset prices, is incredibly difficult to gauge.
Yes, there will be new exciting investment opportunities, but are you the best person to pick these? On the flip side, there will also be investments that are currently considered ‘rock solid’ which will turn out to be less valuable and in some cases next to worthless.
It might sound a little boring, but in the face of such change, holding a well-diversified, highly liquid portfolio of cash, bonds, property and shares is your best defence.
Retirement is not the time to take a ‘double or quits’ approach to your investment strategy by investing in a single asset class, or - even worse - a single asset within that asset class.
There is much more that can be said about this topic, but in summary, my retiree’s guide to cope with a negative market environment has three elements...
- Make sure your portfolio is well-engineered, so your living costs can be drawn from stable capital investments - for an extended period if need be. This will allow growth assets to recover value before they are ‘harvested’.
- Avoid the temptation to oversimplify matters by investing in a single asset class. The world is changing - the ‘thoroughbred’ you were sold today just might turn out to be tomorrows ‘nag’.
- And finally, don’t listen to market news too much. Get on and enjoy your retirement - after all you have worked hard for it.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 7 September 2019, as ‘Retirees' guide to surviving a falling market.’
