When does an investor migrate from accumulating wealth to preserving wealth?

Too opaque a question most people would claim! However, when planning retirement such a question becomes the most adequate question of all.
Over the preceding number of years, never have I had so much pressure from investors to accumulate wealth, putting aside prudence, believing the euphoria enjoyed in certain financial centres will be unabated. Propensity of such investors is to gamble perceived surplus cash, neglecting the old cliché “what goes up must come down eventually”. But when?

Why gamble?
Gambler’s fallacy – the belief that there are discernible sequences observable in repeated random processes, such as the repeated spinning of a roulette wheel.

Financial investing/planning is a far cry from gambling and there are stringent rules to be observed when advising would-be investors on how to differentiate accumulating wealth from preserving wealth.

Time is of the essence – another cliché and so often misappropriated to justify swift action. Never has this been so wrong when planning for the long term.

Factors such as age are among the most critical to ascertain the timing of migrating from “accumulating wealth to preserving wealth”.

When referring to time and age, I am specifically addressing the time frame an investor is able to allow the investment to ride. Definitions of time frames may alter but short-term is widely accepted to be from one to five years. Medium-term five to 10 years and finally long-term a period of 10 years plus.

Age and investment time frame
The science of age and time horizon is most salient when selecting the types of investment suitable for a client. For example, it is generally stated and advisable that an investor should only invest in equities if possible for a minimum period of five-plus years. This is to make the point that growth from equities comes about from medium- to long-term investment and the need to have the time perspective that allows an investor to ride out periods of market volatility.

The key is the ability of the adviser to know the client and advise the client to fully appreciate the type of investment best suited to meet his objectives such as investment instruments/asset class and timeframe (i.e. bonds, equities, commodities, etc.). Notwithstanding the above, the asset class will inevitably alter as the client circumstances change in line with their age.

As such, the investment strategy will need to change accordingly, as will the percentages allocated to different asset classes. A client in their 40s who is investing for retirement will want to aim for long-term growth and will be prepared to accept a higher risk to achieve fund growth.

As retirement looms, the migration from accumulation commences by seeking to crystallise the growth made. Entering the final stage of employment, the adviser, in conjunction with the client, should at this stage be migrating to the preservation phase, looking for investments that will provide a fairly secure income, assuring the quality of life they envisage to fund the autumn of their life.

Accumulation to preservation
Client age group: 50 to 59
In general terms, one assumes a client at this juncture has accumulated sufficient wealth and is far better off now than ever. Their dependants/children have left home and they have a greater level of disposable income. Maintaining this will be important; as they will not want a stock market downturn to ruin the work they have done in growing their assets.

This evolution process of the portfolio, moving from a growth-based instruments portfolio to a more cautious asset class portfolio, should be a transitional process, a seamless and harmonious move, not an abrupt inversion.

Client age group: 60 to 69
The client here has to be mindful of not having the luxury of time to replenish depleted cash due to not adhering to the above transition. The client has now reached that age where accumulating wealth has given way to the need for income and stability. The portfolio will now need to generate income to enable the client to maintain their standard of living, and this will involve further reducing the exposure to equities and increasing the percentage held in income instruments and cash assets.

These are very broad based examples, but they demonstrate how the financial adviser can use asset allocation as a tool for ensuring that the high-level construction of the recommended portfolio matches the client’s circumstances as well as their attitude to risk. The key point to note is that it is the client’s circumstances that drive their investment objectives and attitude to risk.

By António Rosa

António Rosa is Regional Manager in Lisbon at Blacktower Financial Management (International) Limited
Quinta do Lago: 289 355 685 | Cascais: 214 648 220 | [email protected]
Blacktower Financial Management (International) Limited is licensed by the Gibraltar Financial Services Commission Licence 00805B.