Over the past cou­ple of weeks, I have been writ­ing on the top­ic of re­tire­ment.

If you are on­ly pick­ing this, the third in­stall­ment, it may be worth your time to look for the last two copies of the Busi­ness Guardian. The feed­back from these two columns has been quite en­cour­ag­ing which has prompt­ed me to con­tin­ue.

To re­cap the re­tire­ment co­nun­drum is a grow­ing chal­lenge faced by mil­lions of in­di­vid­u­als across the globe. With in­creas­ing life ex­pectan­cies, un­pre­dictable eco­nom­ic cli­mates, and dwin­dling so­cial safe­ty nets, it is be­com­ing more and more ap­par­ent that tra­di­tion­al re­tire­ment strate­gies are in­suf­fi­cient for en­sur­ing a com­fort­able and se­cure re­tire­ment.

I end­ed last week by point­ing out that in re­sponse to this mount­ing con­cern, it is cru­cial for in­di­vid­u­als to take their fi­nan­cial fu­tures in­to their own hands. A key com­po­nent is learn­ing how to in­vest. No one is born an in­vestor. This is as much art as it is sci­ence and it is some­thing that you can learn. It is in the cur­rent cli­mate some­thing that every­one has to learn. The more you learn and the bet­ter you be­come the more like­ly you are to thrive.

Dig­i­tal as­sets form one of the char­ac­ter­is­tics of the mod­ern land­scape and is an in­creas­ing­ly grow­ing trend. As­sets that are dig­i­tal in na­ture will in­evitably be trad­able and will be trad­ed. When trades are made, val­ue is ex­changed and as you con­sis­tent­ly en­gage in this process you are con­sis­tent­ly ex­chang­ing val­ue over time. If you are re­ceiv­ing less val­ue for the dol­lars you are ex­chang­ing you are be­com­ing poor­er rather than rich­er. Learn­ing to nav­i­gate this space is crit­i­cal.

I am sure you have heard the term fi­nan­cial lit­er­a­cy be­fore. Fi­nan­cial lit­er­a­cy is nec­es­sary, but it is no longer suf­fi­cient. It is nec­es­sary be­cause it pro­vides a ba­sic plat­form. It is no longer suf­fi­cient be­cause you are now re­quired to be­come more ac­tive with your mon­ey to gen­er­ate re­turns as op­posed to re­ly­ing on oth­ers to do this for you as was the case for the pri­or gen­er­a­tions.

In this col­umn, I want to in­tro­duce the term in­vest­ment lit­er­a­cy. This is what is now re­quired to nav­i­gate the cur­rent land­scape. The im­por­tance of in­vest­ment lit­er­a­cy can­not be over­stat­ed, as it is a vi­tal skill that em­pow­ers you to man­age risk and ac­cu­mu­late wealth over the long term. Now that I have made the broad case that every­one should be­come an in­vestor, let’s delve deep­er in­to some of the fun­da­men­tal prin­ci­ples that are in­volved.

Daunt­ing

For many, the prospect of re­tire­ment plan­ning is daunt­ing. I know this from per­son­al ex­pe­ri­ence re­lat­ing to thou­sands of peo­ple over the years. De­spite it be­ing daunt­ing, many were com­fort­ed by the fact that they had tra­di­tion­al re­tire­ment plans, they had pen­sions, there is a na­tion­al in­sur­ance ben­e­fit along with their on­go­ing sav­ings. There was enough to get by and leave you feel­ing com­fort­able. All of this is now chang­ing due to gov­ern­ments fac­ing bud­getary con­straints, shift­ing de­mo­graph­ics and changes to work cul­tures both on the part of the em­ploy­er and the em­ploy­ee.

A re­cent phe­nom­e­non is the pro­lif­er­a­tion of “gig econ­o­my” jobs. By my es­ti­mate, it is more than a decade since bring­ing self-em­ployed per­sons in­to the fold of na­tion­al in­sur­ance has been dis­cussed. When it comes to pen­sions, re­tire­ment plan­ning and in­vest­ing, time and mov­ing in a time­ly man­ner is crit­i­cal. In ad­di­tion to the in­creas­ing de­sire by many peo­ple to be self-em­ployed, there is a cor­re­spond­ing de­cline in em­ploy­er-spon­sored re­tire­ment ben­e­fits. The com­bined ef­fect is a lev­el of un­cer­tain­ty sur­round­ing re­tire­ment which is dif­fer­ent from what you may have seen your par­ents ex­pe­ri­ence. The re­sult is that many younger per­sons are not prop­er­ly equipped to face these chal­lenges and so will end up feel­ing over­whelmed and un­pre­pared for their time lat­er in life.

In­vest­ment Lit­er­a­cy

To com­bat the re­tire­ment co­nun­drum, it is es­sen­tial that you be­come knowl­edge­able about in­vest­ing. Here, I am not talk­ing about the knowl­edge you get from watch­ing Bloomberg Tele­vi­sion or lis­ten­ing to a pod­cast on fi­nance or read­ing the lat­est best­seller on the fi­nan­cial shelves of the book­store. I am talk­ing about func­tion­al knowl­edge that you can im­ple­ment, where you know what you need to do when you need to do it.

When you learn how to in­vest you can take con­trol of your fi­nan­cial fu­ture. Through­out my more than twen­ty-five-year ca­reer in fi­nance, I have al­ways told my au­di­ences that get­ting ahead fi­nan­cial­ly is sim­ple. You ei­ther save more, take more in­vest­ment risk or work longer (earn more). That’s it, any com­bi­na­tion of the three will take you along the path.

Sav­ing more is dif­fi­cult be­cause we have to de­fer grat­i­fi­ca­tion. Work­ing longer or earn­ing more is al­so hard be­cause some­times what we are paid is out­side of our con­trol. Yet the most dif­fi­cult of the three is the abil­i­ty to take on more in­vest­ment risk. It is an ac­tiv­i­ty that goes against our very na­ture which is why it is some­thing that you have to make a de­lib­er­ate at­tempt to learn.

A fun­da­men­tal as­pect of in­vest­ing is un­der­stand­ing the re­la­tion­ship be­tween risk and re­ward. Most peo­ple think they un­der­stand this re­la­tion­ship un­til they are ac­tu­al­ly faced with the risk vs re­ward dy­nam­ic. As Mike Tyson fa­mous­ly said, “every­one has a plan un­til they get punched in the face”.

I have seen many peo­ple pan­ic last year when their port­fo­lio fell by 10 per cent, even though they were pret­ty cer­tain the year be­fore that they were in­vest­ing for the long term and would not be over­ly con­cerned by short-term fluc­tu­a­tions in their port­fo­lio. This is not to make fun of peo­ple who are scared by these types of mar­ket falls be­cause it is in fact hu­man na­ture to be scared. The key to over­com­ing any type of fear is to face it and ex­pe­ri­ence it. Cash­ing out and run­ning for the hills is not fac­ing it and does not help you along your path.

By now you should ap­pre­ci­ate that the abil­i­ty to man­age risk is a cor­ner­stone of suc­cess­ful in­vest­ing. I re­it­er­ate the point that risk is some­thing that you need to ex­pe­ri­ence, but even though it can be an un­nerv­ing ex­pe­ri­ence there are strate­gies that you can un­der­take that can help you be more com­fort­able through the ex­pe­ri­ence. Let me out­line four very com­mon strate­gies:

Di­ver­si­fi­ca­tion – By spread­ing in­vest­ments across a range of as­set class­es and sec­tors, in­vestors can min­imise the im­pact of any sin­gle in­vest­ment on their over­all port­fo­lio. This can help to re­duce volatil­i­ty and pro­tect against the pos­si­bil­i­ty of sig­nif­i­cant loss­es;

As­set al­lo­ca­tion – Al­lo­cat­ing as­sets to achieve a suit­able bal­ance is crit­i­cal. While I don’t sub­scribe to the fol­low­ing rule of thumb I am re­lat­ing it for il­lus­tra­tion, be­cause you will of­ten hear it from your fi­nan­cial ad­vi­sor. Younger in­vestors with a high­er risk tol­er­ance may al­lo­cate a larg­er por­tion of their port­fo­lio to eq­ui­ties, while old­er in­vestors ap­proach­ing re­tire­ment may opt for a more con­ser­v­a­tive al­lo­ca­tion with a greater em­pha­sis on bonds and fixed-in­come se­cu­ri­ties;

Dol­lar-cost av­er­ag­ing – Reg­u­lar­ly in­vest­ing a fixed amount of mon­ey at pre­de­ter­mined in­ter­vals, re­gard­less of mar­ket con­di­tions, can help to mit­i­gate the im­pact of mar­ket fluc­tu­a­tions and re­duce the risk of mak­ing poor in­vest­ment de­ci­sions based on short-term mar­ket trends; and

Re­bal­anc­ing – Pe­ri­od­i­cal­ly re­view­ing and ad­just­ing a port­fo­lio’s al­lo­ca­tion to en­sure that it re­mains aligned with your in­vest­ment ob­jec­tives is an es­sen­tial as­pect of risk man­age­ment.

While the prospect of be­com­ing an in­vestor may seem daunt­ing, the process can be bro­ken down in­to a se­ries of man­age­able steps. First and fore­most, you must com­mit to par­tic­i­pat­ing in the process as op­posed to hid­ing out in the com­fort of sav­ings ac­counts. With in­fla­tion where it is at and even count­ing his­tor­i­cal lev­els as a guide, hid­ing out in de­posit-type ac­counts will not help you much go­ing for­ward.

Next, it is im­por­tant to as­sess your re­la­tion­ship with risk. This is more in­volved than ask­ing you a few ques­tions and is out­side the scope of this col­umn. Fi­nal­ly, and this is most im­por­tant, it is cru­cial that you re­al­ly and tru­ly de­vel­op a long-term in­vest­ment plan that en­com­pass­es the things that you would like to achieve with your mon­ey over the course of your life­time.

Every com­pa­ny has a strate­gic plan which they act on and re­view from time to time. If you are seek­ing to work through life with­out such an over­ar­ch­ing doc­u­ment, then you are do­ing your­self a great dis­ser­vice.

Every­one needs to be­come an in­vestor but be­com­ing an in­vestor is not easy. It is a process and it takes time to learn the ropes. But if you don’t make the ef­fort, then the time will pass you by, and fi­nan­cial chal­lenges will even­tu­al­ly catch up to you.

Ian Nar­ine is a fi­nan­cial con­sul­tant who is run­ning his own race against time. Please send your com­ments to ian@ian­nar­ine.com