This is the 7th instalment of our retirement series. In my previous writings, I shared how I used our proprietary tool “RetireWell” to give our client David (aged 59), a reliable income stream throughout his retiring years. (you can read the unedited version of the earlier articles at www.providend.com/articles/
I have written quite a bit on how bucket 2-6 are invested to get the returns necessary for withdrawals during retirement. But how do we ensure that retirees will get the expected returns from the various investment portfolios to make the strategy work?
As mentioned in my previous articles, if retirees invest in low-cost instruments such as ETFs, indexed-based and evidence-based funds and they stay invested over the long run without trying to time the markets by getting in and out, they should get the returns they need. Unfortunately, while the head may understand this, the heart does not. If you look at table 1, across different kind of funds, there is a difference between fund returns and what the investor is actually getting. The key reason can be attributed to investors not staying invested through their investment horizon and getting out too early during a bear market. As such, although the funds are giving the returns, they did not stay long enough to reap them.
But does staying invested over the long run without timing the markets really give the retirees the returns? If you look at table 2, we can arrive at these conclusions:
- If you invest over the past 20 years, there will always be years where in the short term, you have negative annualized returns.
- But if you stay invested, you will always get positive annualized returns over the long term.
However, getting a positive return does not mean you will get the returns you need. As an example, if you had invested in 2000, after 10 years in 2010, your annualized returns over the past 10 years would only have been 0.4% p.a.
Space does not allow me to show you that these observations are the same, even if we stretch the table from 1928 to 2016, almost a century worth of data.
Is it possible to do better if you time the markets and get out before a crisis hits and get in just before recovery? Of course! But our earlier articles have shown that the probability of even professional managers getting it right is very low. These observations not only confirm that it is better to remain invested over the long haul, but that something must be done to help retirees align what they know with how their hearts feel. This is where advisers truly can add value by:
- Creating suitable asset allocation
- Rebalancing the portfolio regular to keep the portfolio’s asset allocation intact
- Doing behavioural coaching
- Implementing portfolios in a cost-effective manner
- Planning the withdrawals (spending strategy)
The first three helps retirees stay invested by always ensuring that they are invested into portfolios that are suitable for their risk appetite. This requires a deep understanding on retirees’ retirement aspirations, required rate of return, financial situation, personal situation as well as their preference to take risk. This understanding further allows regular behavioral coaching to take place so that retirees will stay invested even in the worst of times.
Using low-cost instruments with effective implementation as mentioned in my previous articles enhances the returns. Executing spending strategy allows retirees to get enough returns when they need it. The RetireWell methodology which we have been writing about over the past articles is all about this.
Vanguard calls this value that advisers add – The Adviser’s Alpha. According to their research, this total potential value can be as high as 3% of the net returns you get from your investments.
Many have asked me if they should use a financial adviser to help them plan for their retirement. My answer has always been the same: If you are savvy enough to design your own portfolios, execute it using suitable low-cost instruments, keep your own emotions in check and have a good withdrawal strategy, please do not use an adviser. The savings in fees might translate into higher returns. But just like it is difficult for a doctor to treat himself, or an executive coach to coach himself, you might be better off engaging a competent retirement financial adviser to help you. I think after working so hard for so long, you would want your retirement lifestyle to be as certain as possible.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Retirement Financial Adviser. The edited version has been published in The Business Times on 24 June 2017.