| One of the most common situations we come | | | | expenditure template, and we built her cash flow |
| across month in month out, is a new client in their | | | | forecast. It turns out that to achieve her goals the |
| 50's coming to us with a collection of policies, often | | | | amount of exposure she requires to growth assets |
| worth considerable amounts of money. | | | | (more risky) is 40% of her portfolio. She is shocked |
| In some cases, our office table groans under the | | | | to find that currently her exposure to growth assets |
| weight of various policy documents (only kidding but | | | | is 98%! |
| I'm sure you get the point) amassed over many | | | | So what would this mean in the real world for Mrs |
| years. What is extremely worrying is that in virtually | | | | Jones? |
| every case, here is a client approaching retirement | | | | One of the most volatile investment periods in |
| who is taking far too much risk with their | | | | modern history occurred in 1973/74. If this were to |
| investments! | | | | happen again, then her £200,000 on New |
| What is more, they have no idea that this is the case | | | | Years Day in 1973 would be worth approximately |
| at all. | | | | £62,000 by New Years Eve 1974. Even after |
| They may say something like "I was told by the | | | | the market bounced back in 1975, showing huge |
| adviser who sold it to me that it was safe because it | | | | gains, £200,000 would still have dropped to |
| is in a managed/diversified/with profits fund". Having | | | | £155,000 by New Years Eve 1975. |
| then put the document in a drawer, it does not see | | | | However, if Mrs Jones were in a proper risk |
| the light of day again until the client feels that he/she | | | | assessed portfolio with a disciplined approach to |
| should see "how it's doing". | | | | rebalancing (#) and a 40% exposure to growth |
| Now, we are all human, and so we accept the fact | | | | assets, the drop over two years would be to around |
| that they don't know what they don't know, just as | | | | £163,000, and at the end of 1975 it would |
| a dentist telling us about a problem with our teeth | | | | stand at £271,000. |
| we did not know we had until our regular check up. | | | | That is a staggering £116,000 more. More |
| However, since this is a continuing huge issue that | | | | importantly, it means peace of mind for Mrs Jones, |
| has the potential to ruin a dentist's/doctor's | | | | who is secure in the knowledge that she has |
| retirement plans, let's look at a recent case as an | | | | minimised her risk, and can simply get on with |
| example. | | | | arranging her holiday of a lifetime to Australia. |
| Mrs Jones (name changed) has not seen her adviser | | | | The Financial Tips Bottom Line |
| for many years and decided to approach us having | | | | If you are within 10 years of retirement, get a check |
| been to one of our talks and having received the | | | | up before it's too late! Even though you may have |
| newsletter for sometime. | | | | experienced good returns from the recent rise in |
| She has various PEPs, ISAs and Pensions worth | | | | world markets, don't make the mistake of thinking |
| £200,000. Aged 54, she plans to semi retire at | | | | that shares may not fall in value as well. |
| 55 and fully reire at 60. Working only 2 days a week | | | | # Please note the figures used presume Mrs Jones |
| from age 55 to 60, she has lots of places to visit in | | | | would rebalance her portfolio at reviews held on 31st |
| mind, and this pot of money will help her achieve this. | | | | December 1973 and 1974. Rebalacing is an extremely |
| Readers of this newsletter will (hopefully) know | | | | important investment discipline normallydone annually, |
| about the term Asset Allocation. Basically, this is the | | | | whereby if Mrs Jones is happy to have an exposure |
| percentage that you have in equities/property/bonds | | | | to growth stocks of 40%, and these stocks fall |
| cash, and is absolutely vital to get right. | | | | heavily in value meaning they represent say 22% of |
| Very simply this is because you need to be | | | | her portfolio, she then sells other assets in her |
| comfortable with the amount of volatility inherent in | | | | portfolio to take this back to 40%. In this case of |
| every portfolio. If markets dive, will you panic as you | | | | course it meant buying equities at a low price, and |
| see your portfolio value plummet just when you | | | | seeing these stocks then rise in value in 1975. |
| need it? | | | | ACTION POINT |
| Secondly, since we build cash flow forecasts for | | | | Check exactly what investments you have. What |
| clients, which compare their goals to their assets, the | | | | percentage is in equities and property? |
| idea is you can have a portfolio designed to achieve | | | | If (say) it is more than 80%, you could have too |
| your goals with the MINIMUM amount of risk. | | | | much exposure than either you need, or for your |
| Mrs Jones duly filled in her risk questionnaire and | | | | comfort levels. |