‘Topsey Turvey’ Alice’s retirement portfolio

27th March 2015 by Justin Urquhart Stewart

There are times when you can be forgiven for thinking that the world has turned upside down. Possibly times when everything you have been taught seems to be now almost irrelevant and someone has changed the rules. Well when it comes to investing it would seem that this is now the case and some of the old “standards” and norms that were applicable to certain clients have gone. As an example it was investment folk-lore that as you got older so the proportion of bonds and fixed interest investment you held rose as a percentage roughly equivalent to your age. Thus the new pensioner could expect some 60% of their investments in a range of Gilts and something similar and it gradually increased from there. Quite what you were supposed to do when you became a centenarian no-one has ever said, but in days gone by there were all too few such fellows. Over the next few decades there are going to be many thousands of them – probably including me.

The problem that has come about is that as a result of all the QE and  financial stimulants that have been applied since the financial crash of some 8 years ago, we now find ourselves in a new world where yields have crashed and bond prices soared. Then to add some further madness to it we now are in a world where some rates have turned negative. Some banks in Austria are charging clients to keep money in their accounts with negative interest rates and you have to pay to actually have the privilege of owning quite a proportion of German government Bunds which are now charging negative rates.

So we are now in a position that, potentially, we could be asking pensioners to not just be paying interest back to the German government for owning their debt, but also run the risk that if and when rates do finally rise, they will almost certainly be losing some quite serious amounts of their capital as yields rise and consequently the bond prices fall. So in effect the older you are the greater the risk you are being asked to take!

What alternatives can investors have? Of course there are a range of other assets but mostly not on the size, scale and liquidity of the bond and equity markets. So it means therefore that more investors will be looking to be apparently taking the lower risk of investing in equities at a time when traditionally they would be regarded as riskier! Clients could in fact find a greater proportion of their portfolios in equities actually increasing as they get older, not less.

In the UK this is becoming especially of interest with the changes to the pension rules. As many will no longer be being shoehorned into annuities, they are going to have to find some low risk equivalent to invest in to protect their savings until such time as the odds are more in favour for them to take out an annuity. Traditionally you would find a nice selection of government bonds to tide the position over, but now such portfolios are going to have to take on a very different hue as the risk assets (equities) look securer, and the secure assets look riskier. You really couldn’t make it up.

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