The sea is a fickle mistress; sometimes calm and still, other times tempestuous. Investing for retirement can be similar; at times, your pension and investment plans may grow steadily, only to be followed by periods when their values fall dramatically, leaving you nervous about your financial security and independence.
As with sailing, the journey to your ideal retirement can be unpredictable. Yet, with planning, preparation and patience, even the most turbulent times can be navigated calmly.
Whether it’s choosing the right vessel (your portfolio), understanding the tides (market movements), or weathering a storm (market downturns), in this article I explain how a well-planned approach can help you reach the sanctuary of retirement safely.
Your Investment Portfolio; Choosing An Appropriate Boat.
You wouldn’t take to the Atlantic in a rowing boat. Having the right boat for the planned trip is a critical first decision; it needs to be sturdy, well-maintained, and capable of handling different conditions. The same can be said for your pension or investment portfolio; just as a boat needs to be equipped for all types of weather, your portfolio should be built with diversification in mind—holding a balanced mix of assets that can withstand the most turbulent of market conditions.
A well-diversified portfolio spreads your investments across different asset classes, such as equities and bonds. This reduces the risk that a downturn in one area could sink your entire financial plan. Your investments should keep you moving forward when the winds are behind you but give you stability in the eye of the storm.
While the temptation to invest in high-risk, high-reward stocks might seem like a shortcut to your retirement destination, it’s the equivalent of the rowing boat in the Atlantic. A few lucky breaks might get you through, but the risk of capsizing is far too great. Equally, rowing across the Atlantic may get you there eventually, a portfolio that is invested too cautiously puts unnecessary delays on retiring.
How much investment risk you decide to take will depend on your psychological ability to withstand losses (your attitude to risk) but also your objectives, timeframe and ability to suffer losses without detriment to your current or future lifestyle. The longer your journey the more you can afford to allocate to shares but too much risk, too soon to retirement may leave you exposed. (Watch this video for more on the topic.)
Market Movements and Changing Conditions; Understanding Currents & Tides.
Even inexperienced sailors know that the sea is unpredictable. You can study the weather patterns, check forecasts, and chart your course with care, but you’ll still encounter unexpected changes along the way. Markets are the same. While long-term trends may point towards growth, short-term volatility is part of the journey. Markets rise and fall, often unexpectedly, just like sudden gusts of wind or rough seas.
The mistake many investors make is to panic when stock markets hit choppy waters. A seasoned mariner wouldn’t abandon ship at the first sign of a storm and an experienced investor doesn’t sell at the first sign of a market correction. Reacting impulsively to short-term market downturns leads to poor decisions that damage your long-term goals. Selling out of markets during a dip could mean locking in losses or missing out on the recovery that inevitably follows.
Instead, it’s imperative to stick to the plotted course. While the day-to-day movements might be unpredictable, history has shown that long-term investors who hold a well-diversified portfolio can expect to see positive returns over time. As a sailor trusts that the storm will pass and the seas will calm, successful investors know that staying invested during market turbulence leads to smoother sailing ahead.
Rainy Day Funds; the Lifeboat for Emergencies
Any sailor embarking on a long trip knows that nothing is certain and they do so knowing the risks. Unfortunately, emergencies do happen and when they do a sensible sailor will have the means to survive: flairs, a radio and, in extreme circumstances, a life raft. In retirement planning, the equivalent of emergency procedures is having a rainy day or emergency fund; a savings account to rely on during stock market crashes. This way, if you need money, you won’t have to sell investments during distressed times.
Benefitting from Market Growth; Enjoying Wind in the Sails
Just as storms pass and the seas eventually calm, markets tend to recover quickly after downturns (read another analogy about that here). Historically, market recoveries have led to periods of sustained growth, giving long-term investors the chance to reap the rewards of their patience. In sailing, these are the fair winds when conditions are ideal, enabling steady progress towards your destination.
A portfolio that has an appropriate allocation to shares will reap the long-term upward trend that global stock markets have historically shown (and if you believe in capitalism can expect to continue)
Retirement and Financial Freedom; Arriving in the Harbour.
Having made it across the ocean the sanctuary of the harbour awaits. This is the metaphor for a long career with ups and downs, highs and lows ending with retirement. Whatever retirement means to you, for most it’s the ability to live one’s ideal lifestyle, free from money worries, with the choice to do what you want, when you want, with who you want. Whether it’s travelling (or sailing), spending time with family, or pursuing hobbies, the financial security gained from a well-planned investment journey allows you to live the retirement you’ve always wanted.
If you would like help planning your journey to retirement, contact me.
Photo by Markos Mant on Unsplash
