As someone who has moved jobs a few times I have accumulated a number of Defined Contribution (DC) pension scheme ‘pots’. A few years ago and during an uncharacteristic spree of self-organisation I decided to consolidate these pots into one, under a Self-Invested Personal Pension (SIPP). As someone in the investment ‘know’ I thought I should be well placed to studiously select the most appropriate asset allocation and find asset managers to complete my investment strategy. Both of those features are open to debate and given I subsequently agreed to manage my wife’s SIPP, subject to occasional eye-brow raised questioning and scrutiny. This is particularly the case given our risk appetite differs quite considerably which has resulted in quite different allocations – both in terms of asset mix and manager selection. Given recent market volatility I have seen a marked divergence in the performance of the two portfolios (the detriment being mine!) which brings me to the point that has vexed me most of late – and in this I suspect I am not alone. At what point should I be thinking of de-risking the portfolio from a growth biased one comprised of equities (primarily emerging markets) towards one of lower volatility, with a greater focus on income?
There are large swathes of literature addressing the ‘lifestyle’ conundrum to which I refer. I am a sprightly 51-year-old. I probably won’t consider retirement for another decade or so, let’s say aged 65 for the sake of numerical clarity, so 14 years to go. Some lifestyle approaches or Target Date Fund (TDFs) recommend or begin starting the switch 10, 15 years before retirement, others suggest 5 years is sufficient. For an someone living in the UK the decision process has been muddied by the removal of the requirement to annuitize, so I have the further complication of whether to choose the annuity route or draw-down my income instead and, given this added flexibility, do I consider my investment choices ‘to’ or ‘through’ my retirement date?
Layer on top of all this complexity the fact that we are hardly living in “normal” times (granted it is arguable that such a time ever exists). We are, however, facing unprecedented economic uncertainty with many businesses struggling to make the transition back to pre-COVID-19 operations, countless failing and those that are surviving having to significantly adjust their cost base, resulting in unpalatable employment ramifications for many. Whilst financial markets have rallied from their lows in March we are undoubtedly going to see more turmoil. At some point the massive debt stimulus being put in place will have to be addressed and whilst the low cost of servicing that debt may not cause an immediate issue, the proverbial piper has to be paid at some point.
As if yet another layer were needed, to add to the doom and gloom already painted, there is the potentially systemic changes we are facing as a result of our experiences over the past 5 months. I have written in a previous blog how enforced working from home for this prolonged period will have made people reflect on work/life balances. How many people will consider the trade-off between additional years of employment and the financial reward that brings versus forgoing that choice for early retirement? Or, absent that choice, if we are going to see a shrinking workforce because of the economic woes discussed earlier, perhaps it will be the less youthful employees who struggle to maintain their place in employment. The linear progression of employment to retirement and relying on pension income was already being disrupted, with people in retirement returning to employment and supplementing pension through part-time jobs. I believe recent experience will accelerate the trend further as people decide how to best balance their human and financial capital through time.
Returning to the opening theme of this post, I suspect I shall place a greater focus on looking for better times to rebalance the risk in my portfolio. But the uncertainty that is out there will undoubtedly skew me towards inaction. Perhaps now it is better to focus on deploying my human capital to the best of its ability, hoping for something close to normalisation further down the line when de-risking is not as loaded with complexity?