You might be surprised to know that I have a financial planner. Mike is probably more an accountability partner than anything else, but he ensures that Tracie and I conduct a formal review of our situation annually. After all, I don’t want to be like the mechanic who has the worst car in the street! When you are close to something, it pays to have an objective view.
We review goals, cashflow, risk management, investment, estate planning – the lot!!
We also want to ensure that our super continues to reflect our conservative nature - that is 100% shares.
This may sound crazy to you but after many years in this business, I have learnt some important lessons.
What Does Risk Really Mean?
Most commonly, the definition of investment risk remains the volatility of prices.
I don’t accept that volatility is my biggest problem. The primary risk is not losing money, but outliving it.
As you’ll know, I try to curb an unhealthy focus on daily moves in the market by offering an alternative view.
The chart below is the All Ordinaries Accumulation Index plotted monthly over 35 years to 2015. You can see the ups and downs which gives the speculators, day traders, hedge funds, computer traders etc. and the media, fertile territory to work with!
Here is a different way to look at the same picture.
You’ll see that in both cases we arrived at exactly the same point. I have simply chosen to ignore all the dead ends, shortcuts and deviations along the way! I know what I paid for my shares and I know what they are worth today. The revelation for me, some years ago, was that all the noise in between purchase and today was just useless chatter.
In Retirement, It's Income That Matters Most
The chart below is worth a thousand words. This shows the Industrial Share Index and cash broken into their two separate elements, income and capital. The income streams (the vertical bars) have been available to every one of us for the last 35 years and beyond. It’s a pity that those people who required the most income often chose the asset (cash) that produced the least income over the long-term because shares were classified as risky due to their price fluctuations.
A Real Time Test Of The Strategy
I have friends (Peter and Mary) who are completely comfortable with this concept. They’ve been retired for nearly a decade now and have had the GFC to add some spice. As painful as it was to watch their 100% share portfolio almost halve in value, the income only dropped by 20%. However, as they held enough in cash to cover two years’ worth of pension withdrawals, they simply followed their parents example who, when times were tough, tightened their belts. The value of their shares has since recovered.
Today, too many retire with too little, too early and leave themselves exposed to the disaster that is cashing assets to produce income when prices have retreated. As Pete and Mary drew down on their cash buffer the dividends replenished the account which avoided them having to cash any of the holdings.
Focus On The DividenD Flows
I can think of no better ‘longevity’ insurance than that indicated by the yellow bars above. As the probability is that Tracie will outlive me, we agreed during our review that we’ll continue to have our super invested solely in International and Australian shares, the conservative option, as I'm determined to ensure she'll get the income she'll need.
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