Life Wasn’t Meant to be Easy

While no-one said life was meant to be easy – many investors could be forgiven for thinking it’s pretty well impossible at the moment.

People are understandably concerned about the performance of the share market and how this is affecting their retirement savings.

However if your long-term, or even medium term, goals haven’t changed, stick with your investment strategy.  And if you haven’t got a long-term strategy, you should have.  You’ll find life will become much easier even though the Australian share market has struggled in recent years.

Playing the game of trying to predict what the market will do over the next month, or even the next year, will only result in the herd mentality of selling at lows and buying at highs. 

Unfortunately history tells us that most investors over a long period of time will underperform the share market.  While statistics are hard to find in Australia, most Australian share funds will show the outflows from funds will peak at the very bottom of a market and inflow peaks at the top of the market.  In the US share market, the average investor return is usually about 1/3 of the market return over a 20 year period.

The average self-funded couple entering retirement need their retirement savings to last them 20 to 30 years, perhaps longer.  To achieve this, they need a rate of return on the investments that will cover both living costs and the effects of inflation, and shares are often the best way to achieve this, even taking into account the market decline in recent years.

The Australian share market hit its highest point on 1 November 2007, of 6,873.  At 20 October 2011, a little under four years since the high, the share market is at 4,207, a fall of 39 percent.

While this doesn’t take into account the dividend income that would have been received over that period, which averaged about 4 percent per annum, the market capitalisation, or value of our share market, has fallen substantially.

Those retirees who have commenced receiving a pension from their superannuation account at around this time could well now find themselves with a much-reduced pension balance.  Depending on how their portfolio is structured, it could be by the 39 percent fall in Australian shares, and further reduced because of the annual pension payments being withdrawn.

Why am I highlighting this, particularly for the self-funded retirees who have been hit the hardest?  Simply to reassure those who do have a long term investment strategy including shares, that they may still be on the right track.

This doesn’t mean that every retiree should have all of their retirement savings in shares.  Just as everyone has different lifestyles, we all have different income needs and goals, and therefore require different investment strategies. 

The reality is that most retirees are substantially underfunded for their retirement and the greatest risk is not how investment markets perform, but how long they will need their retirement savings to last.  Therefore a mix of shares and fixed interest investments may be needed.

The reasoning is straight-forward.  Shares can add much-needed growth to a portfolio, as well as contributing to income through dividends.

Quite simply, over an average retirement period of 20 to 30 years, shares will be expected to deliver superior returns to term deposit and bond investments because of the very thing that scares us most about them – their volatility.

For retirees who have experienced three of the last four negative returning years – the 10 year outlook is very good for Australian shares, so stick with them!

Please note this is general advice only.  Please contact us if you would like advice specific to your needs.