No matter your level of sophistication, we think there is a common thread amongst investors: They are all fallible humans. Whilst no one can ensure they will make no retirement investing errors, there are some basic points we think investors should revisit from time to time—a few “do’s and don’ts.” Here we group some under three broad categories—budgeting, time horizon and diversification.
Budgeting: Building a nest egg takes discipline.
Telling would-be retirees they should save is perhaps the most basic financial advice in the world. But without saving, you won’t have anything to invest. The key is to start as early as possible and do as much as feasible. Starting early puts time on your side. This allows compound growth—growth of principal and earlier growth that builds over time—to work in your favour. This is one of the keys to building savings and, unlike investment results, it is largely in your control.
Don’t go over budget.
Relatedly, we think you should make—and stick to—a budget. This is an important step in determining both what you can save and, eventually, what your cash flow need is after you retire. To craft this, we suggest keeping an accurate record of your expenditures. Whilst you may have a general idea about your income and expenses, tracking your cash flows on a regular basis is a good habit to build. These days, many banks offer online access that can simplify this. We suggest studying your finances at yearend (or now!) to determine monthly averages to employ in crafting your spending plan.
When you are done, assess your spending. Are there areas of excess? Could you cut back in places and allocate more to your financial future? What would you cut if you absolutely had no choice? Those questions can be great thought tools to help you identify ways to boost your periodic saving. Critically, though: Don’t exceed your budget. In our experience, many people create budgets that sound great but fail to stick with them, rendering the exercise a purely academic thought process devoid of real world meaning. Budget realistically. Then stick with it.
Time horizon: How long do you need your assets to work for you?
Do think long term
Unless you are a short-term trader, it is likely your investment goals will take time—perhaps a lot of time—to achieve. We call this your investment time horizon—the entire span your financial plan should cover, or the entire amount of time your assets must be working toward your financial goals. A common error we find? People thinking their time horizon ends at retirement. If you need your savings to supplement other retirement cash flow, it is likely your time horizon is at least your remaining lifespan.
The average life expectancy after age 65 is about 20 more years, according to Eurostat.[i] Therefore, the time horizon of an investor needing their investments to help provide for their retirement would likely extend at least couple decades beyond their retirement. Even more, if you want to be careful. If you aim to leave a legacy, have a younger spouse to provide for or another goal that extends beyond your lifetime, your time horizon may actually exceed your life span. This can have big impacts on the mix of equities, fixed interest, cash and other securities you invest in. In our experience, many investors slash equity exposure at retirement. Whilst that may make sense for some, you may need to keep significant equity exposure to capture enough growth to outpace inflation and fund your later years. Lower-returning fixed interest—which some think of as safe—may not generate sufficient return, thereby increasing the risk you fail to fund your long-term expenses.
Don’t think short term
Conversely, if your time horizon is a decade or more, your worst enemy is often overly focusing on short-term performance—weeks, months and even years—and then basing investment decisions on past returns. Markets are volatile—both equity and fixed interest. Their fluctuations are impossible to consistently predict. Reacting to volatility—selling after falls or buying after rallies—can detract from returns by making you miss upside and raising trading costs.
This may seem easy when you read that breezy paragraph without emotional stimuli. Yet when markets are swinging, fear often rises. That fear can trigger fight-or-flight responses in investors, leading them to sell at just the wrong time.
Take note: We aren’t saying you should never exit equity markets or permanently buy-and-hold. But we think markets pre-price widely known information, opinions and forecasts. That means unless you know something others don’t, it is likely equity prices already reflect this. If you need equity-like growth to meet your long-run needs, we think missing positive returns is problematic, as it limits compound growth’s benefits and potentially jeopardises your goals.
Diversification: Benchmarking to a broad index should increase your odds of success.
Diversification is an often-used word in investing. Here is what it means: Spreading your investments across multiple categories and securities to limit both sector or country risk and individual-security risk. We think a key tool here is a benchmark—an equity or fixed-interest index you can use as a blueprint in portfolio construction.
For example, if you choose the global MSCI World Index, you can analyse the percentage in any country or sector. Use this to assess your holdings. Have 80% of your portfolio value in French companies? You might want to rethink that, considering only 3.8% of global developed equity market value is French.[ii] That means you may be overexposed to country-specific issues. Similarly, if you own 50% in Energy shares, you are taking a lot of sector risk, considering only 6.1% of the MSCI World’s market value is Energy.[iii] If you wish, you can use factsheets on MSCI’s website here to assess this.
Don’t concentrate holdings
On the flipside, having only a handful of individual securities, increases risk. How? Simple. Things occasionally go wrong at individual companies the market doesn’t broadly reflect. These company-specific issues could be accounting problems, a management shakeup, scandal or simply not meeting profit expectations repeatedly. If your portfolio is invested in too few securities, an issue at any one could cause great harm. Spreading them out across many companies limits this risk.
Similarly, individual countries and sectors rotate in and out of favour. Too much concentration in any one area can mean you miss out when sector or country leadership shifts.
Often, in our experience, investors concentrate in a narrow set of investments due to what we call “heat chasing”—buying securities based on strong past performance. But you cannot buy past returns, no matter how great they are. In markets, it is cliché—but true—that past performance isn’t predictive. Often, heat chasing means buying something based on price momentum alone—without assessing its fundamental outlook—increasing risk unwittingly.
Investing is a very complex business. But we think keeping in mind basic principles—saving more, taking the long view and staying diversified—can help you avoid error and put you on a path toward reaching your goals.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
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[i] Source: Eurostat, as of 9/8/2018. European Union life expectancy at 65, total, females and males, 2016.
[ii] Source: FactSet, as of 20/2/2019. France share of MSCI World by market capitalisation on 31/1/2019.
[iii] Ibid. Energy share of MSCI World by market capitalisation on 31/1/2019.