Investing for Retirement in the Stock Market
Ways To Retire Comfortably By Investing for Retirement in the Stock Market.Investing for retirement in the stock market need not be the worry it is for so many people. It’s a common worry with stock market volatility. Here are nine things you can do now.
Worry About the Downside
You want stocks which will fall less, and recover faster when markets fall. We do not know what will cause stock falls, but we know they will happen. So we want protection. Take what is probably the safest company in the world — Microsoft — it still fell in March during Covid, but recovered faster. All companies rise when the whole market is, but we need more companies with a high average return, and narrow range of negative returns.
Do Not Have a Portfolio of 40+ companies
I have quite a few people I know who’ve built up owning every stock in small sums. This is not only inefficient, unmanageable and leading to paralysis in investing, but also it does not give diversification because that happens at around 15 stocks (Gates has 23 stocks, and most of his money is in 10 stocks — the same is true of most billionaires). Especially those old timers who have picked up lots of stocks as they’ve been investing for retirement in the stock market for a long time, they need to cull and trim holdings.
Take 12 months and Review
Any stock you own should be held for 12 months then reviewed. If you hold too long or too short you are not going to benefit from its performance. If it drops 30% in that time from its peak, then sell. Research from Goldman Sachs Asset Management emphasis the 12 month period. When a stock doubles, take out your original capital and review the company in 12 months.
Do Not Add to Losers
Never add to a losing position, unless you are ‘pound or dollar cost averaging’ ie you planned all along to buy in instalments to get a better average price, or its Apple, Amazon, Microsoft, Alphabet, Facebook.
Pick Stocks from Around the World
I always meet people saying ‘India, Japan’ — no. You want global stocks because they perform. The country does not matter, as long as they perform. And measuring performance means knowing the free tools which will tell you the cash flow a company produces, it’s ability to outperform the market (Alpha) and it’s consistency of returns (Sortino). Sadly most people do not know these simple truths used by the biggest wealthiest individuals and funds.
Do Not Chase Yield Alone
Many people look at dividend yields and think that allows them to drawdown an income. Actually, in this low interest environment many companies have dropped dividends and their share prices have dropped, so you have a loss. You may get say 5% dividend, but a capital drop of 50%! Better to get a stock going up 50% and taking out 5% of your capital as profit isn’t it?
A small change makes a big difference
Even a one percentage gain per annum in your portfolio can make a huge difference. Focus on the narrow group of companies that will be the best, rather than buying everything you read about to try hedge your bets. When it comes to investing, even if for late life stage ie retirement, it’s not too late to make small changes with big return impact.
Bonds — Equities — Funds
As you approach retirement, you want more certainty. A bank account does that, but no gains. Bonds are meant to give you certainty and a slightly more return. ‘Bond-like’ returns can come from a portfolio of stocks, where they are narrow in their range of moves. Now in stocks, that could mean down still 15–20%, but the upside skew gives you the compensation. The old advice, for the old, investing for retirement to have 60 stocks and 40 percent bonds, may be getting out of date.
Funds for the Confused?
Whilst some prefer funds, remember most funds get their returns from their top 10 holdings by size, and those you could have bought yourself. Do not just buy a fund because it says ‘global’ or ‘growth’ or ‘Emerging Market’. Their poor labelling is matched by their poor performance due to their high fees.
The Benefits of Early Starting
People often ask, ‘what advice would you give your younger self?’ This may sound odd and boring for someone like me, who at age 12 borrowed £100 from my aunt so I could invest. But I would advise my younger self to invest more and sooner.
If your money works harder, you don’t have to. It’s as simple as that. It sounds cheesy. But it’s true.
Let me take an example from the website Benzinga. “The real value of time can be seen in the experience of two investors. Elizabeth starts when she’s young. She contributes $2,000 a year for eight straight years from age 19 to 27.
Even though she stops adding money at 27, she keeps her $16,000 invested. By the time she’s 65, her $16,000 grew to more than $427,000.
Lulu starts at age 30. She lands a good job and begins investing for her eventual retirement. She diligently puts $2,000 a year into her account for the next 36 years. By age 65, she’s contributed a total of $72,000 and her investments grew to a little under $375,000.
Lulu invested four times more money than Elizabeth, but she ends up with less because she missed the opportunity to compound gains on 11 years of growth and contributions. (This example assumes a constant 8% return, which isn’t real world.) The lesson here is that all things being equal, you will be ahead by starting to invest early in your life rather than later.”
It’s worse. CNBC reported, “S&P Dow Jones Indices has studied active managers for many years. Last year, they noted that after 10 years, 85% of large fund managers underperform their benchmark (usually the S&P 500), and after 15 years, that underperformance reaches 92% of managers.”
There are many examples like this. The problem is most of the websites then try to sell you a fund. The problem with that approach is, as the Financial Times wrote recently, “Active managers fail to beat the market again.”
Fund Managers Are Letting You Down
For a student of mine, I went through his portfolio. I showed him the fees on one of his ‘UK Growth Funds’ was £1,000 every five years, on every £10,000 he invested. He was shocked. He’d never read the fine print.
Worse, I showed him how the fund manager’s top 10 holdings, including a tobacco company – British American Tobacco – hardly a growth company that his fund manager promised.
I then showed him the fund had not performed either! So let’s be our own experts. But many of my readers message me saying they’ve never bought a stock, don’t know where to start.
Well, you have bought a stock. Your pension is invested in funds that have bought stocks. Many reputable online brokers will open a SIPP or ISA for you (so it’s tax-free).
Please speak to a reputable online broker like Barclays or Halifax and ask them to show you how to buy a few hundred pounds of, say, Amazon or Apple or Microsoft stock. That’s your starting point.
Investing Unplugged Book By Alpesh Patel for Those Investing for Retirement in the Stock Market
Read my book (free) Investing Unplugged. It’s an international bestseller, published by Palgrave Macmillan. I teach you more about what you need to do. It’s free at www.investing-champions.com