Encore Age

Time is an Investor’s Friend

The earlier you start to save, the better
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Whatever time of life you start investing, the important thing is to have a plan, according to Bryan Dooley, chief investment officer of investment firm LOM.

Financial circumstances, family considerations, risk appetite and ambitions are unique to each person. And all are essential considerations for any investment plan. Mr Dooley said there are two basic approaches that LOM takes with clients planning to grow a retirement nest egg.

“We can run through it based on what you think you can put away every month or year between now and when you want to stop work,” Mr Dooley said. “Or alternatively, we can work with what you think you’re going to need in your first ten years of retirement, and then work backwards to calculate how much you will need to save.”

Inflation is a critical variable to consider. The past year alone has been a harsh lesson of how the cost of living can rise over time.

“You have to save enough for the years after work and make sure your savings at least keep pace with inflation, because in ten or 20 years, $1 million will not buy what it does today,” Mr Dooley said. “Inflation eats away at the value of your savings.”

The effect can be significant. For example, if inflation averaged a relatively modest 2.5 percent over the next 20 years, cumulative inflation over the period would amount to almost 64 percent. In other words, in order to have the purchasing power of $1,000 today, one would need about $1,640 in 2043.

Time is an investor’s friend — the earlier you start the better. Mr Dooley’s LOM colleague Jason Chlup, an investment adviser, offered an enlightening perspective on this during a local radio interview in June.

Based on average stock market returns over time, Mr Chlup said that to save $1 million in 10 years, one would need to invest $5,200 a month. Over 20 years, the same target would require $1,500 a month and over 30 years, about $580 a month.

While the numbers are approximate and the past is not an indication of future returns, the estimations make clear the value of starting early and the power of compounding returns. In the 30-year example, about 80 percent of the $1 million would be made up of investment gains and only 20 percent actual contributions.

As a rule of thumb, Mr Dooley recommended saving a proportion of income equivalent to half your age. “If you’re in your 30s and you’re in a position to save, then try to think about putting away 15 percent of your income. In your 50s, maybe if your children have flown the nest and you’ve paid off most of your mortgage, maybe you can try to save 25 percent. If you can, it’s good to save more as you approach the ‘golden years’.”

The investment landscape has changed markedly with the rise in interest rates, making fixed-income securities, such as bonds, more appealing than they have been for more than a decade. In mid-June, the yield on a 10-year US Treasury bond was trading at close to 3.8 percent, having climbed from less than 0.7 percent three years earlier.

Bonds tend to be less volatile than stocks, but generate lower returns over time. Getting the correct balance between the two in an investment portfolio is partly about age, Mr Dooley suggested.

“Since the great financial crisis of 2008, interest rates have been unusually low and holding bonds was only slightly better than burying your money in the backyard,” Mr Dooley quipped. “Having some bonds was still useful as a safety net, or a balance to your overall portfolio.

“But now we can get higher yields, it’s possible to make more than inflation on bonds, so I believe we can go back to the 110-minus-your-age rule — it used to be the 100 rule, but that has changed because we’re living longer.

“So, if you’re 40, 110 minus 40 is 70, so you could have 70 percent of your portfolio in equities and the rest in bonds and cash. If you’re 60, then maybe you should dial back to 50 percent in stocks.”

Diversification is another critical element of investing. Mutual funds that invest in multiple different securities are one way of avoiding the all-your-eggs-in-one-basket risk. LOM manages several funds with differing strategies, from money-market and fixed-income funds to equity growth, innovation and opportunity, and emerging-markets funds.

LOM’s Stable Income Fund is one Mr Dooley suggested could be especially attractive to retirees. It invests largely in what he calls “boring equities”, such as electric utilities, oil giants and pharmaceuticals, and makes monthly payouts that amount to an annualised dividend yield of 3.9 per cent.

“These are mature companies that may not grow as fast as younger ones, but they are more stable and throw out a lot of cash to shareholders,” Mr Dooley said. “Also in the fund, we have some longer-duration hybrid securities, such as preferred shares with a $25 par value, an area of the market that most people don’t pay too much attention to, but where we have found some good yields.”

So, what should a rookie investor look out for in an investment adviser? Mr Dooley, who is a chartered financial analyst, suggested it should start with credentials.

“I’m not saying that everyone with credentials is a stand-up person, but I do know that to become a CFA, you have to go through a rigorous three-year process that shows you are dedicated to your profession and it includes an ethics element,” he said.

“Then I would look at the firm and the reputation it has in the community, how long it’s been around and who their clients are. Then it comes down to whether you have chemistry with your adviser and whether they’re asking the questions that really matter to you.”

This article is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.

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