No easy answer to this one sorry Bob

Question

I am nearing retirement and have invested in a range of shares, property and bonds. These are secure, low risk investments but I am concerned that they will not provide me with the return I will want when I retire - particularly as I think I have a few more years left in me yet! What would be more profitable investments presuming of course that these are also more likely to be more risky?

Bob

Answer

No easy answer to this one sorry Bob. The approach you have taken is correct in respect that you have spread your investments across the range or style of investments generally regarded as 'core' to any long term, successful portfolio.

The problem that you may be referring to is that some of those investments have not performed at levels you expected. Or you may not have provided enough cash reserve to carry you from one payment period to the next.

A careful review of the total return of each investment is needed. Look to understand both the capital growth as well as annual income produced (less properly calculated expenses of course) and express that as a total return. To take this a step further, adjust this percentage for tax and inflation and then you will have the real return of your portfolio. You may be surprised at just how well you are really doing.

To move to a more concentrated exposure to any one investment or to take a more speculative approach in any one area is not regarded as prudent as you are moving closer to retirement. Capital loss at this point is not a great idea to contemplate.

A more prudent approach would be to assess the longer term income/growth potential of each investment. Compare that to say the current 90 day Bank bill rate and if you are not around 1.75% to 2.25% higher in gross returns, maybe the portfolio structure is less than optimal and needs adjustment.

Some shares in New Zealand have a very high dividend payment policy while others not so. Bonds also vary in regularity of payment, most quarterly, some semi annual and others at maturity (not many of these). Your property could vary from weekly (rent) to monthly, quarterly of even six monthly payments. Putting together a cashflow forecast will help you in understanding just when these payments will come to your account.

In many instances folk are unaware of just how much income they have, as the payments tend to just slip into the bank unnoticed and are spent, and are pleasantly surprised when proper analysis is completed.

If you still are short or the needed income sorry, but the capital sum needs to be greater, save harder or work longer are the only two real options, significantly increasing the risk is not an option in my view.

Original Article published June 2005