- Lower yields and interest rates are making retirees scramble for yields.
- Cash starved businesses, as a result of COVID-19, have deferred or cancelled dividend payments.
- A well-thought investment strategy is a must for all retirees.
- Well-diversified portfolios can help you navigate the volatile times in markets.
Investing and losing your retirement money will likely not let you sleep in the nights. But when you have a strategy that seeks to build long term wealth, you should not worry. A strategy is a must when you are investing during your retirement. Especially in the current times, when one considers the change in business strategy for many companies post the challenge posed by Covid-19.
Since the companies have scrapped dividends, the retirees relying on dividend income are facing dire consequences. Cash flows of the businesses are facing significant stress, forcing the management to preserve cash flows through deferring or cancelling dividends, reducing cost etc.
Saving cash appears to be justified as management need to make sure that business does not go belly up. At the same time, companies have been tapping investors for more capital – some are visiting the stock market to raise capital for strengthening the balance sheets, while some are raising to invest for growth and capitalise on opportunities, which may have been discounted severely.
Image by Steve Buissinne from Pixabay
Retirees often have a risk-averse mindset that restricts them from investing in a wide range of asset classes and induces them to invest in safer asset classes like annuities, term deposits etc. Since interest rates are record low, these highly-safe options do not offer an acceptable yield.
When you adjust the interest rates to account for inflation, you may even have a negative interest rate in most of the safe products. At a time like this, advertisements are being floated to offer fixed interest income as substitutes/alternatives of term deposits, but investors should understand that the deposit guarantee scheme does not back such funds.
Secure cash for near term
As a small investor, you must focus on securing capital for your near term obligation and have enough cash to meet your needs over the near term. But having cash sitting idle always has an opportunity cost associated with it. A retiree may look for cash funds, which invest in short term debt instruments, having a monthly interest payment and a swift redemption process to cash out your holdings instantly.
Assess your risk profile
The main question one should ask here is how much you can afford to lose. The risk profile will form a base for your desired returns and asset classes where you can invest your capital. Investments should be managed, considering your expenses and obligations. Stage of retirement also plays an important role in assessing your risk profile. In an early stage of retirement, you can have a balanced portfolio that seeks to build wealth with an income stream, but later you should go for an income portfolio.
In this type of investments, an investor looks for businesses that have ability to grow substantially over the medium to long term. Such investments will likely be your ticket to long term wealth creation. However, one should have to be very patient with such investment as drawdowns in such stocks are likely large.
At the same time, you may need to be proactive in tracking your growth investments as changes in the operating environment of the business will likely change the growth expectations of the business.
Income investments usually mean assets that will pay you cash for holding them. This usually includes high dividend-paying companies with sustainable businesses and cash flows. Cash flows play an important role in income investments, and any deterioration in cash flows may well hurt the dividend-paying capability of the business.
An investor could also invest in fixed income instruments floated by companies, governments and state governments. Investors seeking higher yield could also invest in high-yielding bonds, but the risk should be assessed thoroughly.
Diversification is perhaps the most crucial part of your retirement portfolio. A well-diversified portfolio would shield you from the volatility in the markets. One can implement diversification by investing in a range of businesses such as telecommunication, consumer electronics, healthcare, metals & mining, financial service, consumer staples etc.
Diversification is not only limited to equity. An investor can also diversify the portfolio by investing in other asset classes such as Gold futures, silver futures, iron ore futures, government bonds, short term government securities, zero-coupon bonds etc.
Reducing opportunity costs
In investing, opportunity cost arises when you skip the next best alternatives to the asset class you have invested. In an effort to reduce opportunity costs, an investor would need to engage in asset allocation practice.
Asset allocation will decide your potential changes in the portfolio. For instance, when you believe equities are overvalued – you may exit equities and allocate the same money to some other asset class, which as per your conviction offers better value at the given prices. Likewise, an asset allocation strategy will likely enable you to minimise your opportunity costs.
Investing has inherent risks. If you were to think that you will not lose money, it could be wrong as there are risks associated with even the highest quality of asset classes. Moreover, potentially higher returns come with higher risks as well. It is imperative that one plans and executes the chosen investment strategy to increase the odds of building wealth.
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