Invest For Growth When You Are Near Retirement.

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Invest For Growth When You Are Near Retirement.

By Warren Ingram, CFP® Co-founder of Galileo Capital.

It is common for investors to think that they should reduce the risk of their investments as they approach retirement. The primary motivation is to protect the precious capital that investors have accumulated over their careers. Unfortunately, selecting the certainty provided by low-risk investments at retirement could be a retiree’s riskiest decision.

Certainty is too expensive

We would all like to invest our money in a way that provides a guaranteed outcome where our money grows without the risk of losing a cent. Many product providers have aimed to satisfy this need for certainty by offering guaranteed products that promise growth at no risk. However, they can only provide a capital guarantee if you pay away a chunk of your growth as a trade-off. The product providers use your sacrificed growth to pay their fees, buy a capital guarantee, and buy a financial instrument that offers some growth to you. Sound complicated? Indeed, it is! because transparent, low-cost products do not generate much money for product providers; they can only earn big money when the products are complicated, and it is difficult for investors to truly understand what they are paying for.

An alternative to guaranteed products would be fixed deposits or money market funds. These are almost guaranteed and very likely to grow your money without losing you a cent. The problem is that you only earn interest. Once you deduct tax from the interest, you are certain to grow your money at a slower pace than inflation. In other words, you have certainty that you will not lose money, but you are almost guaranteed that your money will lose buying power over time. This will happen slowly and insidiously without a single news headline or radio show telling you to watch out. By the time you realise something has gone wrong, the buying power of your money will have eroded to the point where you cannot maintain your standard of living, and you cannot afford to take any investment risk to recover your lost buying power. This tragic outcome faces many retirees who mistake stock market volatility for risk. They avoid volatility in exchange for certainty with their money and, years later, find themselves in financial difficulty without ever having experienced a capital loss on an investment.

Longevity is great when your money also lasts

With people living longer than ever, there is a risk that your retirement savings may not last as long as you do. If you are invested too conservatively, your money will not grow quickly enough to match the increase in the cost of living, especially if you live to age 90 or older.

What should you do?

If you want to ensure that your investments are capable of growing as fast as the cost-of-living increases, you will need to allocate some money to the stock market. It is the only proven investment that has a long history of beating inflation. That does not mean you should invest all your money in shares; rather, invest in a well-diversified portfolio with a portion allocated to growth assets such as shares and listed property. The balance can be invested in low-risk investments like cash and bonds. This will help your portfolio generate inflation-beating returns in the long run, while limiting your exposure to the most volatile asset class – shares.

Reviewing your portfolio regularly is essential to ensure that it is still aligned with your goals and risk tolerance.

Finally, you need to keep your emotions in check. Exposure to growth assets means that your portfolio’s returns will move up and down as markets go through different cycles. The key to success is to remain invested, allowing your portfolio to recover and generate inflation-beating returns.

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