Furthermore, understanding how much a client needs in retirement, and what sources of income they have already set up, will allow you to determine how hard the investments will need to work. For example, whether the state pension needs to be taken into account (but not relied upon) or whether they have existing final salary pension arrangements no matter how small. Understanding these objectives will give an adviser much more information to create a plan and tailor the investments effectively.
Don’t de-risk too early
Once the situation has been assessed and the amount of risk required is decided, you can start to build the portfolio and the strategy so it is set up to deliver over the next decade. The first thing that should be considered, regardless of the portfolio’s size, is having a cash fund built up in case of emergencies. While you don’t want to feel like you’re nannying a client, having an easy access cash fund set up in the case of a broken boiler or a car repair is vital.
That said, too much cash is an issue these days. Interest rates remain paltry, and you have to be prepared to lock cash away for a considerable period just to receive a rate of return that gets close to the current inflation rate. Most of us find that our personal inflation rate is higher than the official index or, to put it another way, what we want to buy gets more expensive.
Even the low inflation that we have experienced over the last decade is corrosive and given the current anxiety about rising inflation that is spreading across markets just now, you have to find assets that will not only keep up with it but beat it. Ultimately, this means having a healthy portion in global equities.
Far too many people as they approach retirement de-risk too early and end up missing out on important gains that can be realised from equities. If you still have 10 years until retirement you should consider having a healthy portion in stock markets and look to gradually alter this over the decade.
Investing in stocks does not simply end at retirement. Think about the world around us now compared to 25 years ago. If you had stopped the investment clock in 1996 you would have missed the emergence of today’s biggest companies most of which are in the technology sector. You will want a portfolio that provides natural income through dividends to contribute towards your income needs, rather than a more traditional approach of selling down the equities that make up a portfolio.
