And How To Get The Most Out Of Each
The way you approach investing and how much risk you take in the process should hugely depend on these 3 things:
- The annualized returns necessary to enjoy at least the same lifestyle during 25-30 years of retirement as when you were working.
- The annualized returns you got up to the point you’re reading this.
- Which investing stage you’re in and how many years you have left until retirement.
Numbers and stats show that 10.25% annualized returns would cover Number 1. As long as you get them consistently on average from the moment you start working and investing. And assuming a regular savings contribution that grows with inflation.
On the other hand, if you’ve been getting the standard 7.5% per annum mutual fund returns for the last 10,15,20, etc. years…
You’ll need more than 10.25% annualized in order to catch up.
That’s where your current investing stage comes in. Depending on how many years (if any) you have left until retirement and how much you need to catch up…
Your investing strategy in any given stage will change.
Today I want to give you a framework for changing it based on different circumstances. So, I’ll walk you through the stages every single investor goes through in their Investing Lifespan…
And give you tips on which goals, objectives, and strategies to set so you can chart a course to the retirement life of your dreams.
Before I do that, let me explain why your No. 1 obstacle on this course is the Retirement Gap the investing status quo creates.
What’s A Retirement Gap And How To Bridge It
The Retirement Gap is the difference between the amount you have saved for retirement…
And how much you will actually need to sustain your desired lifestyle throughout it.
Nearly the whole population (bar a few tiny percent of high-income earners) will experience such a Gap if they accept the status quo of investing.
When I say status quo, I mean investing the standard 10.5% pre-contributions tax of your income into a balanced mutual/managed fund. And then getting 7.5% returns per annum (or less after fees) over the long term, which is the norm for these funds.
Rinse and repeat this type of investing for 40 years at an assumed 2% average inflation rate, and you can’t not create a Retirement Gap.
There are two main causes for this:
- The massive impact of compounded fees on your investment returns.
The more you earn, the more the fund takes in fees.
Compound that over 40 years and the fee amount becomes astronomical even though 1% per year doesn’t sound like a lot. - Overdiversification.
When done right, diversification is great for protecting your wealth.
But engage in too much of it, like the mutual funds do with at least 80% of your savings…
And it will hamper your growth potential more than it protects you from market crashes.
This leaves you exposed to the biggest financial risk of all – not having a big-enough nest egg to enjoy a worry-free retirement.
Okay, now that you know what the Retirement Gap is and why you’re most likely on the path to creating it right now…
Let’s see what you can do to bridge it depending on the investing stage you’re in and how long you’ve been in the status quo.
How To Invest In Stage 1 Of The Investing Lifespan (Ages 18-55)
The earlier you are in this stage, the more you should focus on aggressive growth and accumulation of your wealth. That’s because the long-term horizon you have before retirement gives you a huge advantage:
Ample time to recover AND profit from major stock market falls of 30% or more.
Chances are you’ll go through 1-4 such Bear Markets during this stage. They occur periodically and historically have always been followed by a full recovery. How long it takes for that recovery varies, but on average it takes 6 years.
Your chances to profit lie in waiting out this recovery and engaging in dollar-cost averaging. Here’s how this works:
You purchase a big quantity of shares at a lower price during a Bear Market. Then, as the market recovers, so does your nest egg. Except now you own more shares purchased cheaply during the Bear Market.
Now, because it’s impossible to predict exactly when a Bear market will occur and how long it might last…
You should tread carefully with this strategy.
If a Bear Market occurs when you are nearing Stage 2, you stand to lose 30-60% of your nest egg. This isn’t a problem in Stage 1 when you don’t need to live off it. But you can see why it’s a big deal later on.
I’ll cover how to deal with Bear Markets in Stage 2 later on. For now, you should know this:
At the beginning and middle of Stage 1, a simple buy and hold investing approach with regular contribution of savings should work really well…
And lead to achieving sufficient growth to let the compounding effect add hundreds of thousands of dollars more to your retirement account.
Meaning you will enter the next stage far more prepared and relaxed.
All it takes to get these results and lessen the pressure of achieving high investment income in later stages is a tiny amount of knowledge and effort.
And taking control of your investing decisions instead of leaving it in the hands of the financial fraternity, of course.
But even if you don’t reap the benefits Stage 1 offers and remain stuck in the investing status quo throughout it (or at least long enough to not be able to afford to risk playing with a Bear Market)…
All is not lost.
But you’ll need to take a different, riskier approach in Stage 2 though, as I’ll explain below.
And you’ll need to accurately determine how far behind you are. To do so, evaluate your returns over the last 15 years.
The more your nest egg has lagged 10.25% annualized growth, the more you’ll need to play catch up in the rest of Stage 1 and Stage 2.
How To Invest In Stage 2 Of The Investing Lifespan (Ages 55-65)
If you took advantage of the opportunities Stage 1 offers, you should have experienced the benefits of compounding over the longer term.
So, now you can shift focus from aggressive growth to a more protection-based strategy. This ensures you cover the second biggest risk investors face in their Investing Lifespan…
Sequence Of Returns Risk.
Basically, this is the risk of experiencing a large Bear Market when you’re in Stage 2 & 3 of the Investing Lifespan. As I’ve mentioned before, this can be devastating for your nest egg…
And consequently your retirement lifestyle.
So, continuing with a buy and hold approach during Stage 2 & 3 means you will bear the full brunt of the next Bear market…
Without having ample time to recover from it and take advantage of the ensuing growth.
That’s why you should consider introducing risk management strategies to protect your nest egg and minimize the negative effects of market crashes and volatility.
To do this, you should consider using a simple “in-out” market timing trend-following technique. And ensure you have a researched and back-tested Exit strategy.
You can use trend following to protect as much or as little of your portfolio as you like. Naturally, the closer you are to retirement, the more exposed you are to the Sequence of Returns risk. Which implies the protected amount should drastically increase as you get closer to retirement age.
But if you reach Stage 2 without capitalizing on the compounding effect with returns less than 10.25% annualized…
You must open yourself to risk a bit more in order to catch up. More so if your employer contributions averaged well below the current 10.5% minimum requirement. And even more so if your salary (and hence contributions to your retirement fund) haven’t increased every single year by at least the rate of inflation.
Still, you shouldn’t take reckless, gambling-like risks. Make sure you set your trend-following system and exit signals to the minimum amount of risk necessary to get back on course to a comfortable retirement.
To be able to do so, you don’t just need to take control of your investing with a battle-tested system. You also need the right skills and mindset to execute it effectively.
If you succeed in building those, there’s time to get back on track.
Such an outcome isn’t guaranteed, of course. But failure is, in the case that you stick with the investing status quo. Unless mutual funds and the like miraculously manage to raise their returns over night.
You decide how likely it is this will happen.
How To Invest In Stage 3 Of The Investing Lifespan (Ages 65+ Or Already Retired)
At this point, your retirement account should have enough funds in it to ensure a comfortable & completely self‐sufficient retirement.
But this doesn’t mean you should stop investing. Far from it.
Thanks to modern medicine, the chances of at least one person in a couple living well into their 90s are pretty big. Hopefully, this will happen to both people in the relationship.
But this also means you may need even more funds than you originally anticipated to ensure you cover all health-related expenses and your desired lifestyle.
In other words, you are faced with the risk of outliving your savings (Longevity Risk). So, growth and income should still remain high on your priority list. Just go about achieving them in a more conservative fashion.
Put investing strategies that use market timing to mitigate risk at the core of your Investing Plan, sure.
But also consider including additional income-generating strategies to ensure the lump sum of your savings remains almost intact.
Again, the better your returns in the previous stages, the more you can lean to risk-mitigating strategies. But if you’re reading this from retirement and with a considerable Retirement Gap that can’t support your desired lifestyle and future goals…
Income generation is critical for you. Meaning you should consider tuning your investing approach to a trend-following strategy that once again exposes you to more risk so you can increase your returns.
Look, if you’ve reached retirement without nearly enough funds for it to be cosy, worry-free, and self-sufficient…
You must grow your retirement capital by at least as much as you are spending.
Meaning now you’re even more time-pressed to skill up and take control of your investing. But you can still do it, especially with the right guidance.
So, whatever you do, don’t give up!
The One Thing You Must Do Now Regardless Of The Investing Stage You Are In
If there’s just one takeaway you get from this article, I sure hope it’s this:
Relying on government-funded pensions and investing only with mutual funds & traditional investing avenues is DANGEROUS.
Doing so will almost certainly leave you with a Retirement Gap and lead to you outliving your savings.
The sooner you realize this and take control of your investing, the easier and less risky reaching enough returns to live a comfortable and financially self-sufficient 25-30 years retirement becomes.
The later you come to this realization, the riskier your path becomes because you have to play catch-up.
I realize this article doesn’t go nearly deep enough into how Stage 2 and Stage 3 investors can make up for previous low-return years. I simply can’t cover all specific situations in one newsletter.
But I hope you’ve at least seen that making up for low-return years is possible and that taking action is always better than doing nothing.
In other words, it’s never too late to take control of your investing and get returns that help you enjoy your Golden Years.
Still, it’s best to take control NOW instead of later regardless of what Investing Stage you’re in. And if you want help making that first step to charting a course to the retirement of your dreams…
Email me with a brief description of your situation. Then we’ll take it from there depending on your unique circumstances.
I can’t provide specific financial advice, but hopefully I can point you in the right direction.
