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.
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.
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 firstname.lastname@example.org