Investment Strategy
By Saghir A. Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Your parents and grandparents may have known better about lots of things when you were young. But you probably shouldn’t be following their example when it comes to managing your money in retirement.
“most retirement income for [our] parents and grandparents generation came from Social Security and a defined-benefit pension plan.”
No longer. Defined-benefit pension, which pay a fixed amount, are fading into history. Social Security is seen being at historic for years.
Prioritization as a beginning.
“Your expected returns in fixed income [investment] are lower than they have been in the past.” Therefore retirees, and those preparing to retire, may need to rethink their investment strategies. Every investor is different, so every strategy will be different. Of the most important considerations - risk tolerance the income needed in retirement, total assets and financial goals - the last one could be especially critical. Some retirees focus on maintaining a lifestyle.
Other may want to leave a significant inheritance, make charitable contributions, or help children or grandchildren with college. Depending on your goals, it may be prudent to keep a slightly more aggressive strategy for a longer period of time to try to continue building wealth.
“I think investors need to have a diversified portfolio of equities, bonds, and cash and a percentage are going to vary, variable in how they’re going to invest is their risk tolerance.”
Risk and return usually are correlated. Bump up their risk and your returns might be higher - or dramatically lower. Clamp down on risk and you might minimize losses, but you may also reduce your returns.
Bad assumptions
One of the biggest mistakes investors make is assuming they can use a withdrawal rate - the rate at which they liquidate their assets to cover expenses- that’s actually too high.
Although an appropriate withdrawls rate for most investors will differ, the traditional rate is 4% per year. That’s enough to provide someone with $1 million in invested assets potentially a $40,000 a year income stream (on top of Social Security or other sources of retirement income). “Most clients assume they can withdraw higher than the 4% withdrawal rate.” A financial advisor often has to tell clients, “You can’t support 7 to 8 percent withdrawals rate.” Inflation can also drain your spending power. That’s why fixed income investments, which have lower risk but also typically earn less, shouldn’t be the only type of assets in most people’s portfolio -even those already in retirement.
Risk reduction
There are other ways to potentially reduce risk in your portfolio without relying too heavily on fixed-income investments. For qualified investors, alternative investments, such as private equity funds, and real estates, such as commodities and real estate, serve a similar purpose. “Alternatives have historically been used to help reduce volatility in portfolios.” “You may give up a little of the upside, but then you may give up some of the downside, too.”
Commodities and real estate may act as a hedge against inflation because their values - and therefore the value - and therefore the income an investor earns from them - has historically tented to go up as inflation rises. Bear in mind, while investors may benefit from the ability of alternative investment to potentially improve the risk-reward profiles in their portfolio’s, it’s important to remember the investments themselves can carry significant risk. Government regulation and monitoring of these types of investments may be minimal or nonexistent; returns may be volatile and present and increase risk oh investment loss.
That as important as it is to find the right investment mix, it’s just as important to actually start putting money aside. The biggest problem is many people don’t end up being how their lifestyle impacts their needs for retirement income or whether they have the right combination of assets, it’s simply that they haven’t invested enough. Starting early, even with a small amount, can let you take advantage of compounding interest.
However, if an investor reaches retirement and finds that he or she doesn’t have enough money to support the lifestyle wanted, there are still options, such as cutting some living expenses or perhaps going back to work part time. But putting all your money into bonds and certificates deposit - as your parents or grandparents might have done - may not be able to fund your golden years.
All investing involves some degree of risk, whether it is associated with market velocity, purchasing power or specific security. Alternative investments, such as private equity funds, are not suitable for all investors. Any offer to purchase or sell a specific alternative investment product will be made by the product’s official offering documents. You could lose all or a substantial amount investing in these products. These funds are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of lucidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and /or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulations and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.
Real assets are subject to the risks associated with real estate commodities and other investments and may not be suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Real estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions.
Investments in fixed-income securities are subject to market, interest rate, credit/ default, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in a decline in the bond’s price. Credit risk is that an issuer will default on payments of interest and/ or principle. This risk is heightened in lower rated bonds; if sold prior to maturity, fixed income investments may be worth less than their original cost upon redemption maturity.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
