Retirement is often associated with less risky and more liquid investments, as investors entering their silver years prioritize recurring income over capital growth.
But increasing life expectancy means that capital growth is no longer just a game for young people. As it stands, around one in two Singaporeans aged 65 today will live past 90.
“Potentially living to old age means that it is no longer enough to simply receive a regular income from the time you retire. You need to keep thinking about growing your wealth to make sure you don’t exhaust your retirement savings at an old age, ”says Abel Lim, Head of Wealth Management Consulting and Strategy at UOB.
It’s made worse by inflation, which means everything will likely get more expensive the longer you live, he adds.
The Covid-19-induced global recession has also proven to be a rude wake-up call for many – a sobering test of the extent of its finances under stressed circumstances.
The best of both worlds
To grow their money, investors usually have two options: capital growth or income return.
Living a longer life would give investors a longer time horizon to overcome market fluctuations, allowing them to strike a balance between seeking capital growth and regular income throughout their retirement journey, said Mr. Lim.
Yet economic uncertainty and today’s low interest rate environment have left many investors in a bind.
Historically low returns, for example, can cause retirees to shift their portfolios towards higher-yielding investments, potentially compromising their initial risk profile.
Some may think that it is impossible to grow their capital in a sustainable way while managing their risk and meeting their income needs, and vice versa.
“This is not true. It is possible to seek both capital appreciation and a stable, recurring income by adopting a total return strategy. The combination of these two powerful forces can go a long way in helping investors achieve their goals. long term, ”said Lim.
But what exactly is a total return strategy?
It starts with building a diversified investment portfolio based on personal risk tolerance, which could include stocks, bonds, real estate, alternatives and other asset classes.
When selecting asset classes, the focus is on how the investment complements the rest of the portfolio to achieve the best balance between risk and return, whether paying dividends or interest.
Mr. Lim notes that a total return strategy can be achieved with actively managed investments that seize opportunities through market cycles.
Unlike passive tracking of market benchmarks, an actively managed trust, for example, can flexibly and nimbly allocate funds across a wide range of investments in different market conditions to achieve stable recurring income while maintaining the potential for capital appreciation.
UOB’s “Capital Builder” investment solution, for example, consists of an actively managed SICAV of BNP Paribas Asset Management. The fund makes timely adjustments to investments that have the potential to generate higher returns at different parts of the market cycle.
Lim points out that an actively managed solution can also tap into emerging investment trends such as China’s growth, global healthcare and artificial intelligence.
“Equally important, active management can help you broadly diversify your investments across sectors and geographies, to reduce the risk of your money being concentrated in one type of investment,” he adds.
Investors should review their investment portfolios at least once a year – but preferably more regularly than this – to keep up with changes in their financial goals and market fluctuations.
This is true even during retirement, especially if the retirement funds are invested in assets that may be more volatile. “Whenever the risk level of your portfolio does not match your needs, it warrants a rebalancing of your investments,” explains Mr. Lim.
There are many instances that could trigger a need for rebalancing.
Changes in market conditions can affect asset prices. For example, rising interest rates could affect the value of an investor’s fixed income assets.
Mr Lim adds that structural changes resulting from trends such as digitization could also disrupt the business models of companies or entire sectors, thus affecting their viability as investments.
“That’s why it’s important to keep a watchful eye on your investments and make sure they’re actively managed,” he notes.
Natalie Choy is a Business Times reporter
Read the other articles in our Rethink Your Wealth series below.
Empower mothers to take charge of their finances
Why Holistic Heritage Planning is a Must
Insurance: a tool to cover against life risks
Rethinking investments in the time of Covid-19