What's going to save your portfolio at the next crash.
I am seeing many posts and articles where “ financial experts” explain how they can protect your retirement capital when the inevitable downturn in asset prices happens. ( We don't call it a crash.) There's a blend of factors, active strategies, private equity, direct holdings versus managed funds all seeking your attention in the grab for assets under management. Some managers are reverting to cash to make the most of the asset price rises with a view that when prices fall, they will take your capital and allocate it so that you miss all the down turn and get all the upside. Blue Sky if you will.
Many investors will get caught up in this rhetoric and provide their capital to these fund managers. There are way better salesmen in our industry than I competing for your funds but I don't believe there is an asset manager in the country who cares more about our clients retirement plans than the team at Evolution Financial Planning.
Our view is that low cost, broad market diversified funds with a good allocation to global and domestic businesses in the form of shares will provide the required returns to outlive 30 years of rising costs in retirement.
We are absolutely focussed on ensuring that our clients have the right spread of growth assets such as shares and property and a healthy exposure to cash and fixed interest to act as a buffer against significant price falls. Cash is indisputably the worst investment in the world. Low interest and no growth means it underperforms in most markets. If you compare the long term returns between cash and share based investments, shares generally always outperform in the long run. The reason that we have say 25% in cash for retiree portfolios within their tax free allocated pensions is 3 - fold.
We can continue to pay pension income streams from the cash account for a number of years without being forced to sell growth assets. In times of uncertainty, we can allow the growth assets to rise and fall with market expectations but because we aren’t selling, we can allow the share prices to grow again and not touch the hard-working funds.
We can continue to buy shares every single month from cash funds held in retirement funds. If we assume that share prices will fall over a 30 year retirement life, wouldn't it seem prudent that we keep buying parcels of shares and units even when prices are low? By having enough cash, we can actually benefit from falling prices and buying shares when nobody else will go near shares. This was never better illustrated when Covid - 19 started and share prices fell by 37%. Our clients kept buying shares at rock - bottom prices and has allowed them to grow their funds since.
And finally, cash acts as a psychological weapon against the thought of permanent loss of capital. Assuming that retirees know that they need access to growth assets, then having a suitable level of cash allows them to breathe easier and to know that not all of their retirement funds are at the mercy of volatile share prices.
So next time you see a post about how a professional fund manager can save your funds from the next crash, please know that it has less to do with their strategy or new idea, but rather more to do with your asset allocation, risk profile and ability to deal with changes in asset prices. Your emotional IQ will have a greater influence on your investment outcomes. Accept that prices rise and fall and use this to your benefit to allow you and your family the greatest of retirement lives.
