Retirement is often associated with investments bearing lower risk and higher liquidity, as investors entering their silver years prioritise recurring income over growing their capital.
But rising life expectancy means that capital growth is no longer just a young person’s game. As it is, about one in two Singaporeans aged 65 today will live beyond 90.
“Potentially living to an older age means it is no longer enough to simply receive regular income from the time you enter retirement. You need to continue thinking about growing your wealth to make sure you do not run out of your retirement savings in old age,” says Mr Abel Lim, UOB head of wealth management advisory and strategy.
This is compounded by inflation, which means everything will likely become more expensive the longer you live, he adds.
The global recession induced by Covid-19 has also proved a rude awakening for many — a sobering test of how far one’s finances might stretch under stressed circumstances.
Best of both worlds
To grow their money, investors generally have two options: capital growth or income returns.
Living a longer life would give investors a longer time horizon to ride out market ups and downs, allowing them to find a balance between seeking capital growth and regular income through their retirement journey, says Mr Lim.
Still, the economic uncertainty and low-interest-rate environment today have left many investors in a bind.
Historically low yields, for example, may put pressure on retirees to tilt their portfolio towards higher-yield investments, potentially compromising their original risk profile.
Some may think it is impossible to grow their capital sustainably while still managing their risk and meeting their income needs, and vice versa.
“That is not true. It is possible to seek capital appreciation and stable, recurring income at the same time by adopting a total return strategy. Combining these two powerful forces can go a long way in helping investors achieve their long-term objectives,” says Mr Lim.
But what exactly is a total return strategy?
It begins with building a diversified investment portfolio based on personal risk tolerance, which could include stocks, bonds, real estate, alternatives and other asset classes.
When picking asset classes, the key focus is on how the investment complements the rest of the portfolio to achieve the best balance of risk and return, over whether it pays dividend or interest.
Mr Lim notes that a total return strategy can be accomplished with actively managed investments that capture opportunities across market cycles.
As opposed to passively tracking market benchmarks, an actively managed unit trust, for instance, can allocate funds flexibly and nimbly across a wide range of investments in different market conditions to achieve stable recurring income while maintaining the potential of capital appreciation.
UOB’s “Capital Builder” investment solution, for example, consists of an actively managed unit trust from BNP Paribas Asset Management. The fund makes timely adjustments towards investments that have the potential to deliver higher returns at different parts of the market cycle.
Mr Lim points out that an actively managed solution can also tap on emerging investment trends such as the growth of China, global healthcare and artificial intelligence.
“Just as importantly, active management can help you diversify your investments widely across sectors and geographies, to reduce the risk of having your money concentrated in any one type of investment,” he adds.
Investors should review their investment portfolios at least once a year — though preferably more regularly than that — to keep up with their changing financial goals and market fluctuations.
This holds true even during retirement, especially if retirement funds are invested in assets that may be more volatile. “Any time your portfolio’s risk level does not commensurate with your needs, it warrants a rebalancing of your investments,” says Mr Lim.
There are many instances that might trigger a need for rebalancing.
Changes in market conditions may affect asset prices. For instance, rising interest rates could affect the value of an investor’s fixed-income assets.
Mr Lim adds that structural shifts as a result of trends such as digitalisation could also disrupt the business models of companies or entire sectors, thus affecting their viability as investments.
“This is why it is important to keep a watchful eye on your investments and make sure they are actively managed,” he notes.
Natalie Choy is a journalist at The Business Times