Harold is a friend of mine who writes in the Marcus Today newsletter about retirement.
Harold is retired and manages his money himself, so, unlike the rest of the finance industry that can only pretend to know about retirement without actually having been there, Harold actually lives the dream, and his insights into issues such as downsizing your home (it’s emotional, not financial), health (keep moving), cost cutting (push the banks on fees) and growing old (ever had someone stand up for you on a tram?) are written from experience, not guesswork. So for any newbie retiree investors, here is Harold’s take on how he would structure a retirement portfolio. This is not advice. It’s just how he Harold sees it.
Classic financial advice says that the percentage of your portfolio in cash should be equal to your age, because the older you get, the less time you have to recover losses, but for Harold, it’s not as simple as that. With living costs generally fixed, the bigger your retirement fund, the more risk it can take and there comes a time as you get older when you can get ahead of your cost curve and become more willing to take risks and, as one RACV member once said to me after a talk, ‘‘What is it about you brokers that you think old people are all long-term investors? I’m 75. According to my actuary, I have only 3.5 years left to live!’’
If you’ve got only 3 years to live, who cares about Telstra’s five-year plan? On top of that, when fixed interest returns are little better than inflation, you have to find something better than 75 per cent cash, because in the current market the formula simply doesn’t work. Retirees in a low-interest-rate environment have to look at a more realistic asset allocation that will provide the income they need, without exposing themselves to unreasonable risk. With 75 per cent of your money in cash, you would be lucky to get a 5 per cent return overall, and that’s just not enough, particularly when you allow for inflation of more than 2 per cent and some modest spending expectations, including holidays and the odd one-off cost.
In light of all that, Harold’s first retirement portfolio decision was whether to put a higher than normal percentage of his money into the major banks. The sector accounts for 25 per cent of the equity market, so at least a quarter of your equity portfolio can go in there anyway, but the question is whether it should be more, because the major banks have provided a very good return through their dividends and capital growth and, with one eye over your shoulder for a second global financial crisis, there is no reason that the sector will not continue with its privileged position as a protected oligopoly. Even if there is another GFC, you might be interested to know that, including the compounding of dividends, the bank sector is actually more than 40 per cent higher than it was before the 2007 pre-GFC peak, while the rest of the market is still 25 per cent behind.
In Harold’s words, ‘‘I can’t help thinking that the investment mantra of ‘diversification’ has cost me money and I would have been a lot better off being just a little bit naughty by ignoring it and holding more banks. In fact, I wonder whether the incessant financial advice from the finance industry about diversification, in particular, is not to improve my return, but to avoid the adviser getting sued.’’
The banks are clearly an investment that could continue to provide long-term returns in excess of term deposits, as long as their oligopoly remains and with a notably lower risk reward ratio than most of the rest of the equity market. It seems a pretty low-risk bet.
‘‘I still toy,’’ Harold says, ‘‘with the idea of putting the whole portfolio into major bank stocks along the lines of Marcus’s one-stock portfolio (in this case a four-stock portfolio), but I’ll probably never do it – I’m not that naughty.’’ He notes for us that, ‘‘I do have stop loss settings on my banks to insure against disaster in case I’m wrong, but they are quite low, so I’ll take some pain if it is wrong, but I’m prepared to take the risk and, the truth is, if it’s gone wrong in the banks, I’d have lost a fortune in the rest of the market!’’
So step one for Harold’s retirement portfolio is a healthy dose of banks. For the next instalment on Harold’s retirement portfolio, tune in again in two weeks.
Marcus Padley is a stockbroker and the author of stockmarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au.