My mother-in-law rang me over the weekend. She had some shares languishing away in Australia and, having recently moved permanently to the UK, she was seeking advice on what to do with them.
She has been retired for 20 years now and is, generally speaking, a risk-averse person who would rather forgo a bit of growth if it means she can happily sleep at night.
However, this risk profile didn’t align with her Australian investments at all. When she told me she had three individual stocks making up her portfolio, I winced. Ampol shares had been given to her by her father 40 years ago, and the other two had come about as companies demutualised and issued shares to customers. When I investigated their historical performance, there was nothing that gave me hope that they might start to generate reasonable returns.
I suggested she sell the lot, not only because of their woeful returns but also because they didn’t align with her risk profile and stage of life. Not that I can see owning only three shares aligning with many risk profiles. Having three stocks, however large and reputable the companies, is not an investment strategy, it is a gamble on shaky ground.
However, that conversation left me thinking about the best way for someone in retirement to invest. In my experience, retirement is a point where many people stop thinking of themselves as investors at all.
The focus seems to shift from growing your wealth to preserving what you have spent years building, generating income — and making sure it can last. However, with the average retirement lasting 20 years, there is still plenty of time for inflation to quietly eat away at the purchasing power of your savings.
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The traditional approach, often referred to as “lifestyling”, is to reduce equities in favour of bonds, or from growth to income as you approach retirement. However, finance professionals are often heard criticising this approach and analysis by Investing Insiders into pension fund returns found that most of the biggest losers across the past five and ten years have been low-risk funds of this nature — and, alarmingly, some had returned -17 per cent in the past five years.
So how should someone in retirement invest? First, diversification is the key. A good mix of investments across regions, sectors and asset types is crucial. For most retirees, this can be achieved using funds or investment trusts rather than individual shares. They have the capacity to spread the risk automatically.
But with a 20-year horizon, it would be prudent not to abandon equities entirely. Even a modest allocation to global stock markets can help protect retirement savings against inflation and provide growth over time. When combined with low-risk assets such as bonds and cash, this can help smooth out some of the volatility.
Many retirees find themselves tempted to build a portfolio purely for dividend yield or interest payments but this can lead to taking on hidden risks such as investing in high-yield bonds or concentrating on a handful of dividend-heavy UK shares.
Retirees should also be intentional about cash. One to two years’ worth of spending in cash is plenty to protect yourself from having to sell your investments at a time when the markets are down. More than that and pesky inflation can come into play, wreaking havoc with your purchasing power.
Last, being flexible can help your investments shift with your age and priorities. The right investment mix at 65 is likely to differ from that at 75. The best retirement portfolios evolve with you, not around a static plan that was set in stone decades earlier.
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For my mother-in-law, the solution was simple. Sell the three shares and place the proceeds into a balanced fund, something globally diversified with a mix of shares and bonds with a modest cash buffer. No timing markets, picking winners or worrying. Her money can work quietly in the background with plenty of time to do its thing.
It would be remiss not to point out that every situation is different. Someone with a final salary pension could assume more risk because their income is secure. Likewise, someone relying on drawdown might need to be more cautious with withdrawals during downturns. There is no one-size-fits-all; the approach should be about balancing risk in a considered way, not eliminating it entirely.
For anyone in or approaching retirement, it’s worth taking a hard look at what you hold and why. You may find, as my mother-in-law did, that what once felt sensible has quietly become unbalanced, or that fear of loss has crept in where confidence once sat.
The trick isn’t to chase returns or hide from risk but to strike that delicate balance between safety today and sustainability for tomorrow.
