The variety of retirement investment planning options seems endless and just when you think you've seen them all, another new one comes along!
So how do you choose from this universe of investments? Mutual Funds? Managed or Index funds? 'High quality' world dominator stocks? Emerging market stocks? Private equity? Government bonds? Municipal bonds? Corporate bonds? Currencies? Residential property? Industrial property? Real Estate Investment Trusts? Precious metals? Other commodities?
Retirement investing objective
The objective in retirement investment planning is to select investments that will result in the required annual return after tax income at the lowest possible risk.
In making ones choice there is the critical balance between risk and return.
Depending on your personal circumstances, objectives and personal risk profile your investments will then be divided into a balanced and diversified portfolio. The reason for this division is that returns on certain types of assets are counter cyclical - as one goes up, the other goes down and vice versa.
Every portfolio and asset class carries some risk. Just as you will never summit Mt. Everest by staying toasty warm in your living room, nor will you meet your investing goals without taking some chances.
Asset Allocation - cash, bonds, stocks, property and alternates.
Asset allocation is important... as it turns out that the way you spread your money around is probably more important than the investments it goes to. This allocation being designed to meet your long term objectives and as life never goes to plan needs to be rebalanced annually.
This is like flying on auto pilot, constantly making small corrections to stay on course.
The basic asset classes used as retirement investment planning are stocks, bonds, and cash or cash equivalents and property.
Stocks present a wide range of options ranging from personally managed share portfolios, mutual funds to exchange traded funds.
Investing in individual stocks
can pay off for those willing, or having, to assume the risk. Managing a share portfolio requires both skill and discipline and comes with the highest degree of risk.
may either be indexed funds or actively managed funds. The funds that follow an index aren't as flashy as funds run by superstar managers, but they're a lot cheaper.
An Exchange Traded Fund (ETF)
is a hybrid of individual stocks and mutual funds which holds assets such as stocks, commodities, or bonds. ETF's are traded on the stock exchange and have the advantages of low costs, tax efficiency, and tradability.
Mutual fund hybrid
Another of the options in retirement investment planning is a mutual fund hybrid called a target-date fund. It automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected target date for the investor, for example in this case, retirement.
Diversify ... or crash
To diversify stock holding portfolios requires a mix of individual shares. In a selection of market sectors, in both the domestic and international markets. The combination will depend on the market conditions in the various sectors and world economies and adjusted to balance the risk and return.
Included in your retirement investment planning could also be property. This may be through direct investments in private (excluding the house you live in) or industrial property or in Real Estate Investments Trusts (REIT's).
The risk profile of your portfolio should be to minimise the risk based on the objective you have set for your above inflation return (real return).
Traditionally, portfolios have been structured based on age. The younger you are the higher the risk profile (higher proportion of stocks) and the closer you are to retirement age the lower the risk profile. However this may be illogical. The risk profile of your portfolio should be to minimise the risk based on the objective you have set for your above inflation return (real return).
If you start your retirement investing when you are young you may actually be in a position to have a lower risk portfolio than someone who is older and only starts investing later, or who has disrupted his retirement saving. In this case the older person will probably require a higher risk portfolio to meet their financial retirement objective.
Ideally your portfolio will be self sustaining through retirement and the income will be drawn from dividends, interest and rent. However depending on how long you live and the safety buffer built into the plan you may have to start living off the capital.