Your investment policy statement should read something like this….
A successful long-term investment strategy is necessarily goal-focused and planning-driven. It is arrived at by answering three key questions:
- Who is this money for?
- What is this money for?
- When, and at what rate, will this money need to be withdrawn?
The only intelligent progression in creating an investment plan is: goals, then a plan, and only then a portfolio. The objective of your portfolio, therefore, will simply be to execute the plan over the years.
We will establish when you wish to stop working and what income you will need as well as one-off expenses (home improvements, changing the car, helping children, holiday of a lifetime etc.). Your State Pension(s) will contribute towards these expenses, thereby taking the pressure off your invested money.
Once you stop working we will make sure there’s enough cash available, to cover about three years of your withdrawal needs. As your cash account ticks down, we will discuss how much should be taken from the invested side of your plan to top up the cash side of your plan. The figure will depend on how the investment side has fared. In a bad year we may move nothing, in an average year we may replace what you have taken and in a good year we may move more than has been taken.
It’s essential that your income keeps pace with inflation, therefore your investments MUST be allowed to grow quicker than inflation. Historically, that rate of return as only been achievable investing mainly in equities. An income that has the potential to rise through time is very unlikely to be delivered by fixed income securities.
Instead, we believe that you should be the owner of the “Great Companies of the World”. These companies fully capture human ingenuity, which is the most valuable asset class on earth. Many of these companies pay cash dividends that have historically risen quicker than inflation as has their value over longer periods of time.
We use a very diversified portfolio of tracker funds composed of “The Great Companies of the World”, in both developed and emerging markets, and the highest quality Government bonds.
The historical long-term return of this portfolio has been 5 to 6% pa on average net of all costs. Achieving this return over the rest of your lives is not guaranteed. If returns fall short adjustments may have to be made, some more palatable than others.
The range of returns will likely be very wide. We should expect annual, temporary declines of at least 10%, with declines of 30% (or worse) expected every five to six years.
We protect against the psychological effect this might have by maintaining the three-year cash buffer described above and to make sure such temporary declines never come as a surprise to you.
We will remain invested through any and all the declines and aim to buy more shares at bargain prices. There is no guarantee that such a strategy will succeed.
We will keep this strategy under review and discuss it wit you regularly. But, provided your goals do not change, we do not expect to change significantly either your plan or your portfolio.
In summary:
- Invest to beat inflation in the long-run.
- Have a war chest to cover the short-term.
- THE Goal = years of uninterrupted and growing income.
- Risk / volatility cannot be eliminated, only mitigated.
- Stick to the strategy come what may.