Cry me a river?

So is your portfolio just made up with shares? Do you think that you have diversified because you've bought lots of different shares? Well if that's the case then I'm pretty sure you will be crying a river recently because the markets have had a big correction, and please don't tell me you bought Tesco because they were cheap!

Having money in one asset class does not give you diversification or the promise of greater returns. A little tip for you budding amatuer investors, diversification means different assets.

So if you had some Commercial property exposure and some Corporate Bond (Fixed Interest) you will have had positive returns on those assets that would have reduced your losses on your portfolio this year. The term used is negative correlation, and this is where the investments are affected by different things during the economic cycle. Equities (Shares in companies) will usually perform long term, now notice that I've said usually because between 2000 and 2010 the FTSE 100 produced an average annual return of roughly 2% and this is after dividends, over the same time period UK Government bonds produced 6% annually. Which one offered the greater risk? The FTSE 100 of course by a very long way, so just going for high risk is not a strategy and having no diversification over this time would have produced very poor returns for the level of risk you were exposed to.

A little warning here, past performance does not indicate future returns, so don't think this will happen in the same way for the next ten years.

How many of us want to lose 10 years worth of investing because we went high risk with no real reason why we wanted high risk in the first place. Job number one when you invest is to ask yourself what sort of return you need rather than want. This will not be a known quantity with most investors because their education is based on the highest returns without understanding what the loss of not only money but time will do to their long term goals.

So if you're feeling a bit upset about the past month or feeling that you've made a mistake with this investing thing don't be too hard on yourself. I always ask a plumber to do my plumbing, and electrician to do my electrics and a motor mechanic to fix and service my car, why? I can go on the internet and find out how to do their jobs, YouTube will have videos showing me how to rewire my house so why don't I just do that and save some money? It's because I will never replace their experience or knowledge and end up costing myself more money in the long run with my shoddy workmanship, so I always use professionals.

Do you?

This was a surprise number!

I often talk to people about 'what their number is', this is the amount of money you will need to live on in retirement. People often have asked me how I work it out for them and what's the point of it in the first place so I thought I would blog a little about one client's experience.

This client wanted to know when they could retire as they had hit the 50 plus mark and they were thinking of what standard of living they would have and just as important when they could call it a day!

I use Voyant, this is specialist Cash Flow Modelling software from the US which includes all tax and retirement data from the UK to show how much you have now and what you spend it all on and then it projects this figure into the future to show when you can afford to retire without hitting skid row.

Using this software I showed the client that they could go as early as 57 without losing any standard of living as they had been good savers and they were not a massive spender. We then changed this to age 62 because they enjoyed work enough and just wanted to work less hours.

In a nutshell this client found that the only growth they needed was around 1.92% a year from their existing investments so I simplified them all and put them into risk based investments that don't change the level of risk they take; many funds change risk over time, especially as managers try to cover under performance by additional risk taking. I effectively sacked myself and all future advisors as this client would not need further advice until closer to his retirement, and of course with all the changed options I'm sure I will get the call to go through that minefield with them.

So you can all wonder what you will be able to live on when you retire or you can find out. But remember, for every five years you hold off planning and saving you will need to double the amount you invest. This gets very scary when you hit 50 because you have so little time left for the money to work.

What's your number?