WHILE attending a dinner recently, I met an ex-uniformed officer who received his service pension five years ago. Then 50, he started investing diligently for his retirement. With a simple financial spreadsheet, he was able to calculate the funds needed in retirement, the required growth rate of his portfolio and the ideal retirement age. Over the last five years, his portfolio performed very well, growing at an average 12 per cent per annum. At such a high growth rate, he would take just eight years to achieve financial independence - when he turns 63.
He shared with me the quantitative and qualitative criteria he had in picking stocks and unit trusts. I was rather impressed by his investment strategy and believed he had the traits of a successful investor. However, he ended his story on a depressing note, saying how the current financial meltdown destroyed his retirement goal and wiped out five years of hard work and careful investing.
Coincidentally, during an investment seminar that I conducted last month, a financial adviser asked me how to explain to a trusted client that his retirement portfolio had lost 50 per cent in value. Realistically speaking, there is no use explaining that it is important to stay invested and ride out the recession. Even though the market will eventually recover, given the current state of the stock market, most clients have turned a deaf ear to such advice.
It's often the investments that grow quickly in good times that are the ones that give nasty surprises when markets drop precipitously. Many investors have lost a big chunk of their retirement funds.
There could be many investors who entrusted their money with financial advisers who are facing huge losses now. If you're one of them, you're not alone. All over the world, as baby boomers grow older, they see that dangling carrot of retirement continuously moving out of reach. And millions of current retirees are wondering how much more their portfolios can take.
As a financial adviser or investor, you can't afford to stand still and take the hit. But ask yourself how you allowed this to happen in the first place. Instead of looking for high returns, we should have been looking to prevent a direct hit to our portfolios.
As you approach retirement, you need to re-examine your risk tolerance. Apart from understanding your risk appetite, you need to assess the risk of your portfolio. When the stock market boomed from 2005 to 2007, many retirees-to-be were overdue for a change to their investment portfolio. The percentage of stock holdings would have increased due the bull market and the risk of the overall portfolio would have increased as well.
Let's take the ex-officer as an example. He started 2003 with $400,000 and allocated 100 per cent to stocks and nothing to bonds. With his portfolio growing at 12 per cent, it would have been worth a respectable $705,000 after five years. If this was your portfolio, would you be comfortable with 100 per cent of your nestegg in the stock market at the age of 55?
It is recommended that retirees have not more than 40 per cent of their portfolios in the stock market. If your allocation is significantly higher, consider shifting towards more conservative investments such as fixed income. For many retirees, a comfortable equity allocation would be in the 20-30 per cent range. Although stocks are still the best choice for building wealth over the long term, studies have shown that it is very difficult to recover if you deplete your nestegg in the early years of retirement. Of course, you don't want to sell when the market is weak (like now) and miss out on the rebound.
Financial advisers may have to rebalance clients' portfolios and advise them to take some painful losses. They have to ensure that a client's asset allocation is appropriate for his risk tolerance, so that he can better ride out the volatility of the stock market. Investors who had a retirement plan drawn up some time ago may have to re-assess their retirement projections. The assumptions used then may be very different from what applies today.
After you run your retirement projections, you may find that you can no longer retire as early as you hoped. Do not despair. For a start, look at your debt; go through your recent credit card statements and cheque book to see what expenses you can cut. Know how much interest you are paying on credit cards and other types of debt. If possible, restructure those debt payments so that you pay less interest.
You may consider refinancing your mortgage over a longer period at a lower interest rate so that your monthly payment is reduced. You may even have to save more or make other big sacrifices, such as spending less money in retirement. If you need to work longer, then do so. It might even be healthier to do what you enjoy than to retire completely. Lastly, re-examine your retirement expectations. You might, for instance, find that you get as much enjoyment from simpler activities that don't cost very much.
During a bull run, any investor can look like an investment genius. While you may have been comfortable being a do-it-yourself investor when times were good, you may find yourself in a difficult position today. It may be time to consider finding a capable financial professional to help you. For those of you who already have a financial adviser, consider whether he has taken the time to talk to you regarding re-positioning your portfolio in this market meltdown. Most importantly, has he listened to you and understood your concerns?
This shake-up in the financial sector need not be seen in purely negative terms. Since 9/11, excess leverage has built up in the global financial system. The irresponsible use of non-traditional instruments like collateralised debt obligations (CDOs) and derivative swaps has resulted in a mountain of debt and excessive leverage. If the financial tsunami had not happened today, it would occur in the future with even worse consequences. This crisis will rid the system of excess leverage and bring prices to reasonable levels, paving the way for more sustainable growth.
While the last thing a retirement portfolio needed was a year like this, and there is cold comfort for older investors, there are some bright spots for other investors. One of them is that you can find good opportunities right now in the stock market and you don't have to take on a whole lot of risk to take advantage of them. Simple strategies like this could add to your retirement fund in your golden years.
This article was first published in The Business Times on January 17, 2009.
