Thu | Dec 2, 2021

Oran Hall|Charting a path for retirement

Published:Saturday | September 18, 2021 | 12:09 AM

QUESTION: I am approaching retirement and am seriously looking at preparing for it. I had a discussion with my investment adviser, who suggested that I invest less in equities and more in bonds. I recognise that bond yields are relatively low, so I am considering the wisdom of buying a few cars to operate as taxis. What do you think?

Greg

RESPONSE: Retirement is a critical life transition marked by employment income ceasing, giving way to a pension and savings and investment income to meet living expenses. The earlier active preparation begins, the better generally as compounding over a long time facilitates meaningful growth in the pool of funds required to fund the retirement.

A late start, while not being the best, does not mean that one cannot create an adequate pool of funds to sustain life in retirement. It often means saving and investing a higher proportion of income and taking greater risks to generate higher returns.

There are many who are not where they would like to be because of adverse situations like disruption of employment, or because they started building resources for retirement late, or because they lacked knowledge of how to invest.

But there are individuals who are quite ready for retirement although they do not embrace investing in securities such as stocks, unit trusts or bonds. For example, some invest in a business to be sold at retirement or to be retained in retirement to generate income.

EQUITIES

In your case, I would not be surprised if your portfolio is heavily skewed to equities. Equities are good because they are able to generate significant growth in value over the long term, and they generate income in the form of dividends.

The bad thing about equities is that they lose value from time to time. Most times, they recover the value lost, but this sometimes takes time. At times, it is hard to sell them because of the state of the market when you want cash.

Although it is possible to diversify a portfolio made up primarily of stocks by investing in several industries and in several countries, it is never a wise idea to have a portfolio too heavily skewed to stocks, as tempting as it may be.

Although some hold the view that people approaching retirement and in retirement should eschew investing in ordinary shares, research in developed markets has shown that having up to 20 per cent of such a portfolio in stocks may enhance yields without seriously affecting the risk of a portfolio.

CAPITAL TRUSTS AND MUTUAL FUNDS

But this applies generally to a portfolio that is well diversified, and it is reasonable to say that what applies to a developed market does not necessarily work in a market such as ours. So I would urge caution.

My personal view is that it is best to invest in capital trusts and mutual funds at that stage of life for capital appreciation in preference to investing in individual stocks because of the higher level of liquidity, and importantly, the greater scope for diversification.

So there is merit in the financial adviser’s advice. It would be useful to invest in good-yielding bonds, but it must also be considered that bonds themselves are not without risk. The quality of some make them no safer than ordinary shares, and it should be recognised that the higher the returns, the higher the risk generally. Further, bonds do not offer protection against inflation.

DIVERSIFIED BOND PORTFOLIO

It is important to have a diversified bond portfolio with local and foreign bonds and bonds across different sectors of the economy. The reputation and financial strength of the issuer should also be considered.

In some cases, though, the investor cannot purchase less than a certain amount of a bond, so that may limit the investor’s ability to access some of these instruments. Bear in mind that it is also possible to invest in bonds by investing in the bond funds of unit trusts and mutual funds.

What about business, specifically the taxi business, which seems to be the default option for the world and his wife? We see taxis all over the Corporate Area and in the towns of all parishes. Sometimes I wonder if the operators are really making a liveable income.

There are questions you must answer before making your decision. Who is going to manage the business? What will you put in place to ensure that all the income comes to you? How will you manage the expenses? What will you put in place to ensure that you hire competent and trustworthy people?

DO THE REQUIRED RESEARCH

Would you want to enter into an arrangement with one of the companies that make their radio and other services available to the operators of taxis? If yes, you would need to do the required research to determine their terms and suitability. Perhaps that is a less risky approach.

You should first seriously explore the viability of such a business and bear in mind that although it is income-generating, operating expenses are high and the asset depreciates over time. Whatever you decide, the taxi business is not a substitute for bonds.

Ultimately, your priority is to have a portfolio that effectively gives you a reasonable return without exposing you to too much risk.

n Oran A. Hall, the author of Understanding Investments and the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email finviser.jm@gmail.com