If your investments aren’t doing well, but you’re approaching retirement age, don’t panic.
I received a phone call last week from a woman I see a couple of times a year in her business capacity. We exchange pleasantries on each occasion but that’s it so I was surprised when she called and it took me a moment to remember who she was.
She apologized for disturbing me at home but she felt she had nowhere else to turn. She is approaching 60 and starting to think seriously about retirement. She knew I had written books on the subject and wanted my advice.
Although she had been saving diligently for years, her investment account, to use her words, had “gone nowhere.” The value was not much more than the total she had contributed. Now, with time growing short, she was wondering what to do.
Judging by the e-mails I receive from readers, it’s not an unusual situation. Many complain about meager returns on their investments and are seeking some quick solution that will enhance their profits — without taking on a lot of risk, of course.
There’s no such thing. Risk and reward are flipsides of the same coin when it comes to investing. You can’t have one without the other.
Obviously, I couldn’t solve my acquaintance’s problem over the phone, but I could offer a few ideas that might help her going forward. Afterwards, I thought they might be useful to others so here they are.
Talk to the advisor: If your investments are not producing the returns you expect, step one is to find out why. If you are using a financial advisor, that means sitting down with the person for a serious, no-holds-barred discussion. Make your case strongly and don’t be apologetic; it’s your money, after all. Ask for a clear explanation as to why the account is underperforming. Listen carefully to what the advisor has to say and then do one of three things: tell him/her the strategy makes sense and to carry on with it, or insist on a change in direction, or fire the adviser and find a new one.
If you are your own advisor — meaning you make all the decisions yourself — admit you’re doing a lousy job and fire yourself. Go out and find a professional you trust and ask that person for help.
Set realistic goals: Sometimes people who think their investments aren’t doing well are expecting too much. You can’t expect a portfolio that is heavily weighted to bonds to be generating a 6 per cent return, especially in the current economic climate. So before you pull the trigger on major changes, make sure your investment priorities are aligned with your return expectations.
At the present time, conservative investors (those with a portfolio weighting of more than 60 per cent in fixed income and cash) should aim for an annual return in the 3 to 4 per cent range. Balanced investors, whose investments are fairly evenly split between stocks and bonds, should be satisfied with 5 to 6 per cent. Aggressive investors — those who can tolerate risk and have a weighting of 60 per cent or more in stocks or equity mutual funds — should be thinking in the 7 to 8 per cent range. It’s possible to do even better, especially if your focus is on the U.S. market, but overly optimistic expectations usually end in disappointment.
Watch your portfolio: There’s a tendency to invest-it-and-forget-it. We all live busy lives. Poring over monthly financial statements and assessing them against various benchmarks is time-consuming and, to many people, boring.
But vigilance has its virtues, especially when it comes to money. Conditions change quickly and we have to adjust to deal with them. Last spring’s drop in the bond market caught many people by surprise, including some professionals. But it wasn’t a one-off; it was a harbinger of what’s to come if economic conditions continue to improve and commercial interest rates keep rising. So-called defensive securities such as bonds, preferred shares, REITs, and utilities stocks are highly interest-sensitive and will come under more downward pressure as rates move higher. A proactive investor will make the needed changes before that happens.
The bottom line is that while disciplined saving for retirement is essential it’s not the end of the process. In fact, it’s just the beginning. It’s what you do with the money afterwards that will determine the kind of lifestyle you’ll be able to afford when the time comes to stop work.