I was recently speaking to Bob Sweeney, an ISACO premium client and friend of mine.
During our call, Bob very kindly recommended Ken Fisher’s book ‘Debunkery.’ As soon as I started to read Bob’s recommendation, I was finding many ideas and concepts that were resonating strongly with own my investment philosophy. Today I’m going to share one of those ideas about common investing mistakes with you.
Most investors understand that investment funds are a great and appropriate vehicle if they have a long time to retirement. However, many investors in their late 50s and 60s – approaching retirement or already in it – have been coached by media and industry professionals to think about their investing time horizons in a way that, in my view, is all wrong and one of the most frequently made investing mistakes.
These people naturally think that their investing time horizon ends when they either retire, stop contributing to their retirement funds, or start taking cash regularly from their ISA or SIPP portfolio. They mistakenly think that’s when they should reduce most, if not all volatility risk and start thinking ultra conservative.
Longer Lives, Longer Time Horizons
In my view, this is one of the investing mistakes that can frequently lead to an unnecessary and sometimes serious reduction of quality of life later on. Why? People live longer than ever now, yet many invest, by and large, like they expect to die at age 70. Thanks to better education, nutrition and mind blowing technological and medical innovations, people are living much longer today than years ago.
According to the Office of National Statistics, the number of further years someone reaching 65 in 2008–10 could expect to live is higher for women than for men. Based on 2008–10 mortality rates, a man aged 65 could expect to live another 17.8 years, and a woman aged 65 another 20.4 years
That means the average 65 year old male will live until they are 83 but some 65 year old men will beat this average and live longer. And my guess is, much longer. Think about it, in the next 20 years there's going to be more medical advancements that we can’t fully fathom now. And today’s retiree is overall more fit, active and healthy than ever.
What this means is if you’re 65 years old or approaching 65, my suggestion is to adopt a long-time investment horizon, especially if you come from a long living family and are in good health.
Many investors approaching their retirement mistakenly think reducing risk is smart by moving out of equities and into bonds and cash instruments. It’s true that having a ISA or SIPP portfolio of gilts and cash won’t be as volatile, but volatility risk is just one kind of risk. There’s investment risk – the risk that if your bonds don’t perform. There’s also opportunity risk – the risk of missing out on a better investment.
Running out of money - worse than death
In a 2010 poll conducted by Allianz Life Insurance Co. of North America of people aged 44 to 75 found that more than three in five (61 percent) said they fear depleting their assets more than they fear dying.
By thinking too short-term, many investors approaching retirement invest too conservatively, which can be one of the most detrimental investing mistakes. It can mean that they get poor returns, fail to stay ahead of inflation and, as the years pass by, their retirement pot slowly but surely gets smaller and smaller.
When approaching retirement, it's important to plan over a long enough time horizon. Volatility may make you feel bad in the near term, but if you die before your spouse and fail to plan for the correct time horizon, you could leave them regreting these investing mistakes later in life.
Personally I think it’s a big gamble to believe that you and your spouse will be just average and live another 10 years – then find out you're abnormally healthy, live another 20 or 30 years and run out of money after 10. Plus, it's later in life that you'll want the additional comforts money can buy. Seen that way, investing too conservatively could be seen as high risk.
Investing in quality growth funds over the long-term
If you had a long time to invest (and most likely you do), the odds are in your favour when investing with quality growth funds. The longer your time horizon, the better the odds that the equities owned by growth funds will treat you better than cash or bonds – and by a wide margin.
Most investors with a long time horizon – 20 years or more – are likely to need at least some growth. And don't forget about inflation's impact. Retirees who need their ISA or SIPP portfolios to better the pace of inflation and provide some cash flow are doing themselves a disservice by removing all or even most volatility risk from their portfolios.
Without risk, you can't get growth. And without growth, your portfolio can be ravaged overtime by withdrawals and inflation.
Avoiding these investing mistakes
To help your portfolio survive the long haul you'll want to avoid investing mistakes like these. It's likely that you'll need to hold some portion of your ISA and SIPP portfolio in stocks most of the time. And you can do that by buying quality growth funds and holding them over the long-term.
If you're thinking about how to save for the future, then I hope you've found this post helpful. As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.
ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.
Clients enjoy being informed throughout the year what ‘best of breed’ funds our premier investor currently owns, when he’s buying and when he’s moving into the safe harbour of cash – helping clients enjoy more control, manage their portfolio more effectively and benefit from the potential of outstanding long-term returns.
For more information about ISACO and our Investment Guidance Service, please read our free brochure.