Retirement planning: the benefits of opportunistic investment

Retirement planning: the benefits of opportunistic investment

Simon Mawhinney

In order to get the best returns, advisers and their clients must work together to seize opportunities other investors have missed.

How do you continue to grow your wealth after you retire?

When it comes to retirement planning, it is crucial to make the most of the opportunities one has to grow one’s wealth. And because retirement planning is primarily about creating enough of a nest egg to cater for the years when we aren’t working, it is important to have an investment that generates an income that will at least keep pace with inflation so your standard of living doesn’t diminish.

Traditional investment advice tends to sound like this:

If you are saving for retirement and you are young, you have a long time horizon and so you can afford to be invested in equities or stocks on the share market. This is because stock prices tend to be more volatile or unpredictable in the short term. If you have a longer time horizon, you can benefit from the generally upward growth trend of stocks and avoid having to sell your stocks if they happen to be down when you need your money.

But if you are approaching retirement, or are already retired, you should not be invested in stocks because of their perceived ‘riskiness’ as explained above in point 1. You should be invested in fixed income or what are perceived as traditionally ‘safe’ investments like cash, money market or stocks with high yields.

Modern retirement planning realities require us to think differently about investment choices
Statistics show that globally, the biggest risk retirees’ face is the risk of outliving their retirement savings. Thanks to medical and other advances, humankind is, on average, living longer. This means that we should plan to live as long after retirement as we may have worked to save for retirement. In investment terms, this means that even if one is retired or retiring now, one has to see one’s portfolio as a long-term one and continue to build capital, but without taking what could be perceived as excessive risk. This means we must think differently about our investment choices at and after we retire.

What is a worthwhile risk/return trade-off when it comes to retirement planning?

Because we tend to see things differently at Allan Gray, we challenge the notions of what many typically regard as ‘safe’. A traditional view of a ‘safe’ investment would be an investment in a conservative fixed income portfolio, but the returns that are achievable from this asset class have been proven to be lower than inflation over time. In contrast, the average annual return on Australian shares over the past 113 years has been 7.5%, after inflation. We think to beat inflation, one must be able to access the benefits of carefully selected shares. And think differently about risk.

What is opportunistic investment in this context?

In the context of retirement planning, we believe opportunistic investment is about generating sustainable long-term capital growth before AND after retirement. And remaining aware of the silent risk of inflation and deceptively short-term ‘peace of mind’ that can mislead us simply because an investment price may appear less volatile and give us a false sense of security.

If shares are the way to go – but not necessarily all shares – one must therefore find an investment manager that is truly active and carefully selects businesses whose shares offer value. We need to see things differently and then think differently about what we see. And if one does not have the expertise or insights or capacity to do this ourselves, one must ask who has a track record that demonstrates this skill?

To identify the opportunities to benefit from and beat the market, one has to think differently

At Allan Gray, our contrarian, fundamental and long-term investment approach requires us to see things differently. And globally, for longer than 40 years it has been a recipe for long-term investment success.

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The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice or its related entities. This information is general in nature and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. To view our full terms and conditions, click here.

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