Asset allocation is the key to steady capital growth and income suitable for retirees
RETIREMENT OVERSEAS usually involves huge lifestyle changes. You need to get used to a different way of life, a different country, culture, currency, food and, of course, better weather!
You will probably have sold your property in your home country to finance your dream home in Portugal, and have a bulk of cash left over to finance your move and retirement. But, just as you have to change and adapt to your new lifestyle, it is possible that your finances in retirement will have to be adapted too.
What suited you in younger working days will not necessarily apply now. The goal posts have changed and your needs and desires are different. You want to ensure that you have an income to supplement your pension and keep you in a manner in which you are happy and comfortable. You also want to know that there is enough in your investments to meet any capital expenditure that may occur, such as health care and home improvements, etc.
One of the most important decisions you will have to make, is how to structure your investment portfolio and which is the best way to meet your goals. You should decide what is the minimum amount of income you need to support yourself, your time span and what amount of risk you can afford to take.
Retirees often want to keep risk to a minimum, and the best way to do this is with strategic asset allocation – the way in which you allocate your capital into different investment groups. It is essential that you spread your portfolio over a wide range of asset classes such as equities, bonds, property, guaranteed investments, cash and currency.
While well considered asset allocation will include a cross section of equities, property, cash and bonds, these assets, within each class, should be diversified. The range may include investments in international markets. In the past, people would most likely choose a selection from the UK and the US, but there is much broader scope within the global sphere, such as Asia, other emerging markets, the new EU countries and those lining up to join.
Equities should include large and small companies, established and new firms. Bonds could include government bonds (gilts), corporate bonds as well as high yield bonds. Investment grade bonds will provide the more secure element, while the high yield will come with higher risk, but also with the potential for higher returns and income. This is best done by including a bond fund as an asset allocation.
To reduce risk further, you should also consider diversifying your portfolio across management styles, which work differently according to prevailing market conditions. Some styles perform better in a market cycle than at other times. To guard against any under-performance, diversification across styles will act as a buffer when one particular style loses favour.
One very successful way to diversify further is to employ the multi manager approach. A single, top-performing manager, however skilled and successful, does not usually operate consistently at a high level. Managers work better in some market conditions than others. The multi manager approach involves placing your assets with multiple management firms, which give access to a wide ranging number of talented managers, who are monitored according to performance and replaced where necessary.
For your asset allocation to perform well, your investment portfolio should contain asset classes that have a low correlation with each other. If your asset classes are too similar, then the returns will tend to move in the same direction together, and at the same time. A well-balanced portfolio will contain asset classes so diversified, that when one section is not doing well, it will be counterbalanced by another section, which is likely to be showing good returns. You do not want to be vulnerable to all high risk classes. While the risk produces a healthy return, it should be balanced by low risk categories.
Once you have made your choice of asset allocation, it should normally be reviewed on an annual basis to see if any adjustments need to be made to tune in with prevailing economic and market conditions. Flexibility, as well as diversification, is necessary for the effective maintenance of your investment portfolio. It is also possible that your personal situation will have changed since the last review, which may call for adjustments to be made. If your investments are all ‘wrapped-up’ together within a suitable life assurance bond, you should be able to make asset allocation changes to your portfolio with little or no cost.
Now that you have retired in the sun, you will want to sit back and feel confident that your investments are set up for capital growth (and income if you need it), but are protected from the eroding influence of inflation and tax. It is a shrewd investor then, who places his investment portfolio in a life assurance wrapper, which is designed to legally mitigate tax and, when used with a suitable trust, can help with estate planning.
The key to minimising risk while maximising returns, is through making the right choices for your asset allocation, with diversification as a major factor. This investment strategy will enable you to retire without having to worry about market risk and inflation eating away at your nest egg.
• To keep in touch with the latest developments in the offshore world, check out the weekly news update on our website, www.blevinsfranks.com