If you’re over 50, you’ve lived through the 1987 crash, the dot-com bust, the global financial crisis (GFC) and now the COVID-19 pandemic. They’ve seen turbulent times and if you were an investor during these periods, you’ve more than likely had some sleepless nights.
Despite the bumps, investing in the share market has still proven to be one of the best ways to build wealth over the past 30 years. $10,000 invested in the Australian shares index 30 years ago would be worth $130,000 today. This amount increases to $186,000 if you invested in US shares. Conversely, if you’d left that $30,000 in the bank, you’d have only $44,000.
At 50, you’ve hopefully got at least a good 30 years (or more) to go, so there’s still plenty of time to grow your nest egg by investing. On the other hand, leaving all your money in cash is a near certain way to fall behind.
Some people worry about investing in shares, because they’ve seen people lose all their money. But these people probably didn’t have a sound investment strategy and, if you plan your investments correctly, you can minimise the risk. In fact, by not investing, you’re still taking risks: the risk of not keeping up with inflation and the risk of your savings running out sooner than they should.
If you’re over 50 and concerned about market volatility, here are four things to consider:
Keep some cash aside for living expenses
Being forced to sell investments to cover living expenses can be stressful, and it’s even worse when those investments are down. To avoid this scenario, it is generally suggested that you have at least six months’ worth of expenses reserved in cash. If you’re particularly risk averse, you might like to set aside up to two years’ worth of expenses. By keeping your living costs separate from your investments, you won’t be affected by falls such as the 2020 market fall.
Consider the best place to be investing
For many people who aren’t yet retired, it might make more sense to be investing inside your super fund or self-managed super fund (SMSF) rather than outside super. This leads to tax benefits. You might also want to consider using an often forgotten contribution opportunity – carry forward contributions. These allow super fund members with a balance of less than $500,000 to use any of their unused concessional contributions cap (or limit) on a rolling basis for five years.
Diversify well to reduce bumps along the way
Investing used to mean putting money into bank and Telstra shares and crossing your fingers. These days, Exchange Traded Funds (ETFs) and online investment platforms or robo-advisers allow you to diversify across thousands of companies instantly, as well as access global share markets and defensive assets such as government bonds and gold.
A focus on asset allocation gives you a dramatically improved risk profile compared to just owning shares. A portfolio that’s diversified across sectors, countries and different types of assets can help to reduce the impact of share market bumps by up to 90 per cent.
For example, when Australian shares fell by 20 per cent in the first quarter of 2020, clients who had one of Stockspot’s conservative portfolios (35 per cent in shares, 65 per cent in bonds and gold) were only down 2 per cent.
Proper asset allocation that matches your risk profile can give the risk averse a break from watching the movements of the Dow Jones or obsessively tracking an index.
The other benefit of mixing your assets to match your age and risk capacity is that you also have the confidence to take advantage of market dips and buy a few more shares when markets are down.
While this is the ideal strategy, often people need advice to get started because if you’ve never invested before, it can be overwhelming to pick ETFs, rebalance your portfolio and manage tax reporting.
Investing in a low interest rate environment
A common rule of thumb is that you can withdraw 4 per cent of your portfolio value each year in retirement without the risk of running out of money.
Using this rule, for every $500,000 you have, you’d withdraw $20,000 a year. This used to be possible when interest rates and dividends were higher but in a low-interest rate environment fewer and fewer investments are generating a 4 per cent return.
In the low interest rate environment you have two choices:
1. Take more risk with your investments in an attempt to generate 4 per cent income each year, or
2. Stick with a balanced portfolio (matched to your risk profile) and supplement your dividend income (currently around 3 per cent) by selling a small part (e.g. 1 per cent) of your portfolio to make up the 4 per cent.
I recommend the second approach because it ensures you aren’t taking more risk than you need. To implement this approach, it’s important to construct a portfolio that will generate both income and capital growth. It also means a much smoother investment path and you’ll avoid the volatility of owning a concentrated portfolio of dividend shares.
Over 50s should be taking smart risks
If you’re over 50, you’ve picked up life experience and smarts, and that’s why you might be risk averse.
But there are ways to invest that will match your risk profile or tolerance. Focus on having a cash buffer that you’re comfortable with, investing in a tax-efficient way, and pick a strategy that cushions the impact of short-term share market volatility through asset allocation.
The alternative of not investing at all could mean that you see the value of your savings whittle away, and that’s a risk you want to avoid.
Have you investigated any of the suggestions above? What changes have you made since COVID hit? Do you have any ideas for other members?
Chris Brycki is a passionate consumer champion and founder and CEO of Stockspot, Australia’s biggest online investment adviser. With more than 21 years of investment experience, he sits on two advisory committees for industry regulator ASIC, and was previously a fund manager at UBS. He has holds a commerce degree from UNSW.
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.