I would suggest that the greatest uncertainty, and thus the greatest risk to the longevity of your savings in retirement, revolves around investment returns.
Unfortunately there is no easy way to address this uncertainty. We can develop strategies which, based on past market behaviours suggest that the uncertainty of future returns is lessened, but in reality the actual return that you achieve on your investments, irrespective of strategy, is fundamentally and irretrievably uncertain. The actual outcome – how long will your funds last in your retirement – is dependent on so many moveable and unpredictable parts, many of which are impossible to predict with any great degree of accuracy. This is a fact that you must accept.
The best I can do for you is explain what I understand of those risks, and the best you can do is take that information, augment it with your own research, and synthesise it to decide on an investment strategy.
What complicates things further, and this is most unfortunate, is that it is difficult to draw upon any accepted “best practice” in developing your investment strategy because, while some commonly accepted practices, such as the benefits of diversification, have been proven to provide significant investment benefits, others, such as dollar cost averaging, have been shown to produce inferior results (discussed in Appendix 1).
This, most likely, is a more frank introduction to investment strategy than you are likely to receive from a great majority of advisors. Perhaps that is because some perceive an imperative is to appear all-knowing to put the client’s mind at rest. One aspect of that is simplifying complex issues. That is good for the advisor’s business, but it is not reality.
My approach is to work with clients to understand the uncertainty so that they can deal with it in a rational way and so that investment strategy can be optimised from the outset and adjusted if and when different events transpire. My belief is that knowledge empowers my clients and understanding and accepting the inherent uncertainty leads to better outcomes (including emotional wellbeing whereby ill-informed investors can feel victims of market events while well informed market participants are more accepting of the true nature of markets).
This is similar to a deeply personal experience in my own life (please bear with me – it does have relevance, I promise). My wife and I knew before our youngest son was 12 months that he had allergy issues. He became ill when he first tried wheat and corn, and his skin reacted to my hands having dairy cheese on them. We thought it prudent to see a paediatric allergist so that we could ensure that we could develop his diet appropriately. We had to wait several months to see the specialist as he is in high demand and at the time we thought little of it. In that appointment we learned that not only was our son allergic to these common foods, he had very severe allergies to eggs and dairy to a life threatening level. For my beloved son these common foods were tantamount to poison – for him egg might as well be cyanide! As the allergist handed me the prescription for my son’s adrenaline auto injector he noticed that I was quietly sobbing. I have never forgotten his response. He explained that before our appointment we were totally ignorant to the very high probability that my son would have an anaphylactic (severe allergic) reaction to these common foods and that he could die. But actually knowing this information allowed us to manage the risk and thus very significantly reduce the chances of it happening. Moreover, he had empowered us with knowledge and tools to act appropriately if an allergic event should happen. Once that sunk in, it provided us with a degree of security in an inherently uncertain wider environment.
That is what I aim to do for my clients.
In Appendices 1 and 2 I present material to aid you in your journey towards making informed investment decisions. Appendix 1 discusses investment considerations, and in many ways it addresses many of the shortcomings of advice and comments frequently made in the Australian financial services industry. Appendix 2 is an up to date assessment of the current economic environment in which investment decisions must be made. The literature cited and recommended reading will also aid you in that journey. I will certainly be available to support you, and discuss issues that arise and ideas that you have along that way if you so choose. But it is imperative that I underline that in 5 years, all things going well, you will likely have accumulated the greatest net financial wealth that you will ever possess in your lifetime. Many of your remaining dreams and aspirations, including legacies for your beneficiaries, is contingent on how that wealth is invested. It is possible to outsource the full responsibility for deciding on how your funds are invested. But I would suggest that it is just too important to your future to do that, and I encourage you to maintain a very active role in managing your portfolio.
© Copyright Brett Edgerton 2019