6 Ways To Preserve Capital & Achieve Your Retirement Goals

Having too much money in risky assets can be a problem, particularly if you are within 10 years of your planned retirement. The question is: how do you best solve this? 

 

Here are six factors we consider when advising clients - to provide the best chance of preserving capital and achieving retirement goals.

1. Identify specific capital pools and their objectives 

We start by quantifying the lump sum a client is likely to need for their desired level of income in retirement. Let's call this the 'essential' capital pool - most clients want to know that this will be available without doubt to fund their retirement plans. As a result, the investment objective for this 'essential' pool of assets is likely to be conservative - focused on capital preservation rather than capital growth.   

Then, we consider additional funds that a client has over and above this 'essential' capital pool. Let's call this the 'discretionary' asset pool. This could be money that a client has earmarked for gifts to children, beneficiaries of their estate, philanthropy, or maybe for themselves for a future spend. As the purpose for these funds is often longer term, the investment objectives will also be longer term, with greater tolerance for risky assets that provide capital growth.  

2. Get real about risk

Risk is too often discussed theoretically - where people talk about 'growth' or 'balanced' or 'conservative' portfolios with limited 'stress testing' as to the implications for the frequency of negative returns or the risk of capital loss.

We discuss risk not only in terms of frequency of downturns, but also in terms of how much money you're prepared to lose in a given year. Can you tolerate a 15%, a 20% or a 30% market loss in a given year? Do you know the real risk of loss with your current super or investment portfolio? 

3. Determine your ideal asset allocation - and invest in line with that

When you are clear on your real risk tolerance, the next step is to determine your asset allocation - that is, your ideal mix of shares, property, bonds and cash. We develop a personalised asset allocation for each client that is based on forward looking expectations for risk and return for each major asset class.

Importantly, this forward-looking asset allocation for each client rarely looks like the pre-mix asset allocations in most superannuation default funds, which we believe are often too aggressive. For example, we create a 'balanced' portfolio with 50% in risky assets and 50% in defensive assets - compared with most pre-mix funds that have 70% in risky assets and only 30% in defensive.

This is just one way in which we apply a more conservative approach to managing risks for clients, while maximising expected returns. 

4. Plan to take risk off the table

If you are within 10 years of retirement, it's a good time to plan to take risk off the table. As discussed above, for your assets which are 'essential' for providing your income in retirement, it is ideal to gradually decrease your level of risk as you approach retirement.  

Of course, in that period, if share markets outperform, you will need to be comfortable sticking with your steady and assured investment strategy.

 

5. Be patient when re-allocating 

If you have cash waiting to invest, it may make sense to take a patient, staged approach to investing your money. You do not have to put all your money in at once.

Spreading your re-investment out over several weeks or even months enables you to reduce the risk of loss, particularly when markets are as volatile as they are currently. A sudden rise or dip on any given day can have a significant impact on the value of your investments.  You may sacrifice a few dollars - it's a small price for peace of mind.

6. Be proactive

Take a long term strategic approach, but don't set and forget. Be proactive with your asset allocation in line with shifts in the factors that influence expected risk and return: economic conditions, market valuations, yields, and equity price earnings ratios. Again, this is about staged shifts - like when driving in traffic, changing one lane, not five, at a time.  

  

The Bottom Line

Volatile markets are challenging. Taking a structured and proactive approach in managing your super and investments will provide you with peace of mind and a greater chance of achieving your retirement goals.