How Long is Long-Term?

For many investors – particularly those in retirement – the question ‘how long is long-term?’ could also be translated as ‘I’m getting on a bit, so should I still be investing in the stock market?’.  When it comes to systematic investing – that is to say, capturing specific market risks in a disciplined and rules based manner – a subsidiary question might also be ‘should I still own value and small cap stocks, as their excess returns, relative to the market, can take some time to come through?’.   

Even at 80, when investors may begin to ask themselves the question ‘how long is long-term’ they should still consider 20 years to be a sensible horizon.  After all, according to a useful little calculator provided by the Office for National Statistics, today, an 80-year-old woman has an average life expectancy of 90, a 1-in-4 chance of reaching 94 and 1-in-10 chance of getting to 98.  Consider the following:

  • As an investor in equities, you have around a 1-in-4 to 1-in-3 chance that you will suffer a loss in any one year. Yet at a 10-year horizon a 60 equity /40 bond ‘balanced’ portfolio has a better than 1-in-20 chance.
  • For long-term investors, cash is an extremely dangerous asset class, particularly when viewed after the effects on inflation, as it should be.  It is worth noting that over the 10 years since the Credit Crisis those placing their assets in UK cash have lost over 20% of their purchasing power. 
  • Portfolios tilted towards value and smaller company stocks exhibit worst-case outcomes materially better than un-tilted portfolios at 10-year horizons and beyond.  This helps answer the question whether an investor who is 80 should include value and smaller company stocks in any equity allocation they hold. They probably should.
  • Investors with horizons longer than 10 years – even those simply seeking to maintain purchasing power – should own a meaningful level of equities in their portfolio.
  • Cash and bonds alone are unsuitable for most longer-term investors. 

Answering the question

On balance, ‘long term’ should be defined as 10 to 15 years minimum.  Above 15 years, the chances of a negative purchasing power outcome are low, but the risk still exists!  To be prudent, 15 years might be considered as the lower end of ‘long term’, which is still within the investment horizon of most investors, including those in their 80s.  We hope that helps answer the question.

Other notes and risk warnings

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Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

Peace, Love & Understanding: Help Your Heirs See Eye-to-Eye About Family Wealth

Leaving money to heirs can be a tough road to navigate, but when it comes to transferring ownership and control of sizeable wealth to multiple family members, the task can become significantly tougher. In a nutshell:

  • Nonfinancial issues and family dynamics must be addressed to ensure your heirs don’t erode your wealth.
  • Convey to your heirs your family’s values and how they translate to wealth and financial matters.
  • Family constitutions and ethical wills are smart tools for family financial harmony used by many of the Super Rich.

BSW Inner Circle Report -Transferring wealth to heirs

Retirement Income: It All Used To Be So Easy

You are a long time retired!

Thirty years ago, securing an income in retirement was relatively simple; collect years of service in the company’s pension plan and retire on a defined percentage of your final salary.  Today, for most, the risk and financial burden of securing a retirement income has shifted from companies and governments to individuals.  Turning investment assets into a stable income that will support a retiree’s expenditure throughout the unknown length of their retirement is a complex problem.  There are no easy solutions, as markets do not deliver consistent returns and the sequence in which these returns are experienced matter.

The sequence in which returns occur matters when taking an income

Let’s look at the impact of the sequence of returns in two scenarios.

  1. A £1,000 lump sum pot that has no additions or withdrawals.
  2. A £1,000 pot from which a withdrawal of £100 is made each year.

We will use the following 10-year hypothetical series of annual returns (Table 1), which delivers an annualised return of 4%, whether experienced ‘forward’ or in ‘reverse’.

Table 1: 10 years of hypothetical annual returns – forward and reversed sequences

Retirement income - scenario 1

Scenario 1 – A £1,000 lump sum pot that has no additions or withdrawals
It makes no difference, in the end, because 1 X 2 X 3 (‘Forward’) is the same as 3 X 2 X 1 (‘Reverse’), as the table below demonstrates.

Table 2: Scenario 1 – A £1,000 lump sum pot that has no additions or withdrawals

Retirement income - scenario 2

As soon as money flows into or out of the pot, the sequence in which returns are experienced has a material impact on outcomes, as we can see below.

Table 3: Scenario 2 – A £1,000 pot from which £100 is withdrawn each subsequent year

As soon as money flows into or out of the pot, the sequence in which returns are experienced has a material impact on outcomes, as we can see below.

Retirement income - scenario 3

This scenario equates to taking an income in retirement.  Even though the return sequences both deliver the same outcome on a portfolio with no cashflows, in a withdrawal scenario, weak returns and withdrawals in the early years (‘Reverse’) deplete the portfolio substantially, and when the better returns come in later years, these returns are applied to a far smaller portfolio balance.  The result, in this case, is an impecunious retirement for those experiencing the ‘Reverse’ sequence. Whilst, withdrawing £100 (or 10% of the starting balance) is unrealistically high, the point is made.  The sequence of returns matters, and upfront and ongoing planning is essential.

The value of retirement advice

It is evident that many people in, or approaching, retirement need to take advice from a well-qualified and experienced financial planner.  Choices to transfer from a final salary scheme, buy an annuity or set up a withdrawal strategy are highly complex.  Tax and regulation make an already complex issue, even more challenging.   Modelling an individual’s circumstances and evaluating and understanding his or her requirement for income certainty is key.  At that point, building a suitable portfolio and withdrawal strategy – perhaps encompassing some pre-identified strategies for dealing with poor market outcomes – is the next critical step.  This is not a set and forget process.   An insightful discussion on the progress of the withdrawal strategy is needed on an annual basis.  Recognising and understanding the possible challenges ahead – and dealing with them before they become problematical is central to success.  In most cases these events won’t arise.  But if they do, that is when a good adviser will earn his or her weight in gold.

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.