The two questions I ask myself with my financial planning for retirement are “what is my attitude to risk?” and “what is my capacity for loss?”.
The classic investment principle states the higher the risk, the higher the reward. Our pensions are a tax-efficient way to squirrel away money for later in life to provide an income for when we retire – and the investment principle applies the same to them.
As a new member of club age 40, I foresee three decades before I retire aged 70. That time horizon means my pension investments can absorb the shock of losses in the short to medium term. Former Labour Prime Minister Harold Wilson quipped a “week is a long time in politics”. Well, 30 years for investment strategy in pensions is metaphorically a biblical age in comparison.
Cast your mind back 30 years ago to 1994, Tim Berners-Lee had only recently invented the World Wide Web and VHS tapes were all the rage. So looking ahead 30 years from now to 2054, the only thing I can guarantee is that there will be change. So my pensions investments and savings strategy can afford (in fact can ill afford not) to take risks.
I consider my savings as three pots. Pot one is to manage my day-to-day spending in my current account. Pot two is for my rainy day funds to cover unexpected financial emergencies. Last but certainly not least is pot three, which is for the longer term. My pensions here can be considered as a long-term savings account.
Since I first started earning income as an 18-year-old during my gap year working with accountancy firm KPMG, I contributed to my pot three. 10 per cent towards my pension and the same into the stock market (which is primarily for long term but can be dipped into when necessary).
In my 20s, I worked in the City as a trader for investment banks Lehman Brothers and Nomura (as well as qualifying as a chartered accountant at PwC). So I feel confident in understanding the nature of financial markets.
While short-term unpredictability can be nauseating to investors, equities – shares in companies – tend to outperform cash in the long term. So with 30 years to go, I’m a fan of emerging markets, speculative asset classes (including cryptos) and volatile stocks such as Nvidia, Tesla and Apple.
While we might also overestimate the short-term effect of tech and artificial intelligence in shaping our world, we genuinely underestimate its long-term impact. As an educator, I know technology holds the key to our consumption of knowledge in the future, so I’m exposed to tech-based funds.
Another consideration some people look at when mulling over their pensions and investments is the change in the political landscape. With the Labour Party storming to a landslide in the UK general election, and how will this change my investment strategy for pensions?
As it was largely priced in, there were no dramatic immediate movements in markets. And in the long run, stock markets tend not to be significantly influenced by elections. Despite that, UK stock markets should be uplifted by greater political stability as there will be increased attention on the relatively attractive valuation of UK shares.
So how can I expose my pension investments to potentially at least 10 years of renewal under a Labour government? Sectors like infrastructure and defence are likely to experience a boost over time.
Labour have committed to building 1.5 million homes in the next Parliament. The Prime Minister Sir Keir Starmer has also said he is committed to increase UK defence spending to 2.5 per cent if he can. I will be seeking to find appropriate house building and aerospace/defence companies for my portfolio.
So what if you want your pensions to benefit from stock markets but don’t have the time or risk appetite to manage individual stocks? Tracker funds or passive/index funds follow the overall movement of a market or index.
Exposure to tech can be gained through the Fidelity Global Technology Fund and Sanlam Global Artificial Intelligence Fund. FTSE 250 funds probably benefit more from UK specific growth compared to the more globally focused FTSE 100.
Overall, I believe taking risks with your pension is no different to taking risks in other areas. With a longer timeframe, it will give the best chance to build an income for a retirement lifestyle I want.