You can't be prepared for every eventuality, but you CAN take control of some things. You know about investing for longevity, so what's next?
Remember Your Levers
There are lots of things we can’t control in life and in wealth. The season these blogs are based on was recorded during the COVID19 lockdown. At that time, I wasn’t planning to be working from home for several weeks, but it turned out that I was, just because someone in Wuhan turned to his wife and said “Do you know what, I really fancy some bat for tea tonight.”
You CAN control costs, and you CAN control the investment mix of your portfolio, and you CAN control your spending. As ever, these are the things to focus all your attention on. Ignore markets – they don’t care about your precious retirement timeline. Instead be prepared for whatever they throw at you.
Build a Cashflow Ladder
If you haven’t already, listen back to my conversation with Abraham Okusanya about investing in retirement. Abraham is seeming of a national expert in this regard, and his book, ‘Beyond the 4% Rule’, is well worth a read.
Having read that book, and some of the academic studies he describes in his book, I’ve arrived at what I believe to be an effective way of setting up a portfolio for longevity, no matter what markets throw at you, and I call it the Cashflow Ladder – I should probably see if that term is copyrighted. I bet Kiyosaki’s done it already. Long-time blog readers and podcast listeners will have seen me talk about risk-flex before. I explain it in a Five-Minute Friday video. That’s the basis of the Cashflow Ladder.
You start with your fundamental attitude to risk – that’s your neutral investment approach. If you haven’t already, then you can take a free risk questionnaire on the Standard Life website. There’s also some stuff on the Money Advice Service site if you’re new to this.
If you want to take risk tolerance and behavioural finance to the next level, you’re looking for the MyBE app, from my multiple-time guest Neil Bage. The app is shortly to be renamed BEAM, and is iOS-only for now, but should be on Android and a web version as of June/July 2020.
Once you have a baseline attitude to risk, that is your starting point. The idea of the Cashflow Ladder is that your shorter-term needs are invested in a lower risk way than the money you’ll need in the more distant future. Not rocket science, let’s face it!
I like to think of four levels, based on the time when you’re going to need the money:
- First two years – should be held in cash
- Years 3-5 – should be invested a notch or two DOWN from your baseline risk tolerance
- Years 6-10 – invested in line with your ATR
- Year 11 onwards – invested higher risk than your ATR
The rationale for those timelines and those risk profiles will be explored in detail in the next post.
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