Your journey to retirement: Trek to the peak, but mind your step

Investors are often told that staying invested in a fixed asset allocation portfolio for the long term is all they need to generate returns that meet or exceed retirement goals. Here’s why we think this principle is flawed.


Stephen Kwa

Stephen Kwa

Head of Product, Fixed Income & Multi-Asset

For much of the investment community, there is conventional wisdom to the trade.

This wisdom is based on two simple rules: invest a portion of your money in broad categories like stocks and bonds, and maintain that allocation for many years. Stick by these rules, and you stand a strong chance of ending up with good investment returns.  

These ideas have been used to power the bulk of retirement strategies in the market, and to educate individuals who want to grow their retirement nest egg.  

But investors saving for retirement are like hikers making their way to the top of a tall mountain. Just as the journey involves navigating jagged peaks and dangerous descents, handling the twists and turns of financial markets may require you to make mid-course corrections in order to avoid falling off cliffs and reaching the summit.

Even seemingly inconsequential factors, like your year of birth, can have a significant impact on whether you end up meeting your retirement goals.

A family of investors: How much luck goes into investing? 

To illustrate, let’s look at a family of three investors: Ray, his son Chris, and Ray’s granddaughter Mardi. All three chose to adopt the same retirement strategy, setting aside 12% of their salaries each year (adjusted for an increase of inflation plus 2% a year) to invest in a traditional balanced portfolio comprising of 60% stocks and 40% bonds.

Ray was born at the turn of the century, and started investing in 1919. He spent the next 40 years making regular contributions, finally retiring in 1958. Ray earned an average annual real return (return above inflation or the rate of cash) of 5.4% on his investments over the period, and his retirement nest egg grew to a multiple of 8.5 times his final annual salary.

Then there was Chris, who started his investment journey in 1935, following his dad’s techniques. But by 1975, his long-term average return amounted to just 2.4% a year in real terms. His portfolio only grew to 5.6 times his final annual salary – two thirds of Ray’s outcome.

Finally, we have Mardi, who retired in 1998 after 40 years of contributing consistently to her retirement savings. She earned an average real return of 5.5% a year, almost identical return to Ray’s. But her retirement savings ballooned to 11.3 times her final annual salary – an outcome that is 33% better than Ray’s.

All three investors employed the same savings and investment strategy over a time period that many would consider long term. So why the large variance in final outcomes?   

The simple answer? Timing.

Mardi was fortunate to have been born at the “right” time, during the post-war boom, which saw the economy grow at an incredible rate. The stock market, in turn, soared. And even though she encountered the Black Monday stock market crash in October 1987, the next decade that followed was a bull run that saw stocks triple in value. This gave Mardi time to recover from the 1987 losses.

In short, she really lucked out. 

Now Ray managed to catch the nine-year bull market run before the Great Depression struck. But while Ray and Mardi averaged out similar long-term returns of close to 5.6% a year, there was still a large difference in final outcomes.  

Of the lot, Chris was the worst hit, being unfortunate enough to retire just after the stock market crash of 1973-74 when markets fell more than 35%.

Avoid falling off cliffs - there are a lot of them!

Significant dips in the market occur more frequently than you might expect.

Market corrections happen for many reasons, and they are often unpredictable. For investors who are still in their early years of saving for retirement, a downturn can actually be an opportunity.

For someone aged 35, a 20 or 30% fall in markets will be unfortunate, but not enough to derail any long-term investment plans. It actually even opens up the possibility to purchase additional shares from robust companies at a discount, which can add to returns over time.    

But for those who are close to retirement, say at age 60, a market pull-back of this magnitude can be dangerous. This is because after years of contributions, your retirement fund is likely to be at its largest.

Let’s face it: not everyone will be as lucky as Mardi. With more money at risk, even moderate shifts in returns have an outsized impact on how long your savings last. It’s a long way to fall from the top!

Be wary of dangerous descents

Even if you do make it to the peak with your retirement savings intact, a portfolio’s value can go up and down from year to year based on movements in the market. This can have a material impact on how long your savings last in retirement. 

Video: What is sequencing risk and why does it matter for retirees?

In the years leading up to retirement, investors still have the opportunity to extend their actual retirement date or alter the saved amount. But those at the onset of retirement are unlikely to enjoy such flexibility, and could face the prospect of losing years of hard-earned savings if markets take a wrong turn. 

Let’s take a look at historical data. The chart below shows how long savings can last in retirement, assuming an investor withdraws a fixed 7% of total savings each year in dollar terms, indexed to inflation.

Outcomes range from a low of nine years through to 90 years

Even a single year can make a major difference. An individual retiring in 1973 would see his savings last 13 years. Someone retiring just a year later would have enough for 21 years, while a retiree in 1975 would see his savings last for 43 years.   

The key takeaway is this: portfolio volatility is not merely a risk that you wait out in the face of a series of adverse market returns. And this risk is amplified when the size of your retirement fund is large and you are regularly withdrawing money from your savings, rather than actively contributing to it.

So how can retirees and those preparing for retirement manage their exposure to these risks?

While we cannot predict how stock markets will move, history has shown that bear markets are typically followed by healthy recovery, so it is important to stay the course even when sentiment turns sour. But the reality is, investors in the thick of a downturn tend to panic and many end up selling their investments at a loss.   

Another way that can help retirees cope when starting a drawdown strategy is to adjust the withdrawal amounts based on prevailing market conditions. However, this may not be an option for individuals who require consistent returns and don’t have time to wait for stocks to bounce back.

For these individuals, a strategy that focuses on avoiding big losses while generating stable returns regardless of the external environment is critical.

Diversify but remain flexible 

Investors have long understood the importance of a broadly diversified portfolio in mitigating risk, but this is only part of the answer.

The problem with many investor portfolios is that the diversification strategy is typically a fixed one.

A traditional balanced fund takes a blend of stocks and bonds in a static ratio, usually a split of 60% stocks and 40% bonds for a mix of assets that offer growth potential and fixed income. Such an investment strategy is common and generally accepted as normal practice across the industry.

But relying on static asset allocation in a market that is anything but static can be risky. A fixed diversification strategy assumes that valuations don’t impact risk and that correlations between asset classes remain constant over time. This makes any approach to reducing risk premised on static asset allocation flawed.

Video: Why a static asset allocation strategy is flawed

While an investor with this type of portfolio can expect to earn a satisfactory return of 5% a year over the rate of cash or inflation, we are, in fact, looking at a very long time horizon – between 85 to 110 years.

Over shorter, more realistic time frames, such as rolling 10-year periods, the difference in outcomes for investors in a 60:40 balanced portfolio has historically been huge.      

There is no simple formula for finding the right asset allocation for every individual. But it is important that investors manage their portfolios with specific investment objectives in mind. 

For retirees or investors approaching retirement, diversification should be geared towards reducing the incidence of loss and achieving consistent investment returns.

An asset allocation strategy that is not only flexible but unconstrained can meet these competing aims. It does so by reducing or removing exposure to assets vulnerable to drawdowns and exploiting opportunities in changing markets.  

More importantly, this type of strategy will reduce the impact that your birth year – lucky or not – has on your retirement nest egg.  


Schroder ISF Global Target Return is designed for investors seeking stable, consistent returns in all market environments. 

Find out more about the fund and our objective based investing capabilities here


Note: This article was adapted from "Understanding the journey to retirement" (2012) by Simon Doyle, Simon Stevenson, Greg Cooper and Chris Durack.  


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