Most people will not have the risk appetite to pick a portfolio of shares to invest their pension money into.
This is fine because nowadays we have things called investment funds where a fund manager will help you spread your risk and manage a huge number of shares for you.
A global equity (another name for shares) fund has historically produced very good returns which will satisfy most people’s retirement needs.
History tells us that it is very hard to beat the overall investment market, so for those that don’t have the time, inclination or skill it’s probably not worth trying. Luckily, you can just invest in an index tracking global equity fund and you will receive the market return.
However, in this article I want to explore how you can actually pick your own shares quite easily with one of my favourite share portfolio ideas.
Not only has this idea produced better returns than the overall market over the last ten years, but it is also really simple to implement.
Why you need to invest your pension money
Before we dive into the share portfolio let’s just remind ourselves why it is vital we do invest our pension money.
When your younger, working and building up your pension can seem like you don’t need to take much notice of your pension. It will keep increasing because you and your employer keep paying into it.
However, once you reach retirement there is nothing more going into the pot, that’s it. You will now begin the phase of taking money out of the pension pot.
At this point it is common to think you need to take less risk with your pension money. You feel that you need to protect what you have.
Unfortunately, this can be a dangerous approach to take.
You see, we are living longer lives than our parents and during this life the cost of the goods and services we use will keep increasing in price. This is called inflation.
If our pension money doesn’t at least keep up with the rates of inflation, then we are effectively losing more and more money each year just by buying the same things.
Once in retirement you are of course going to use your pension money to live off so will be making withdrawals from the pot every year.
Without any investment growth you might withdraw too much too soon which could mean the pension runs out before you do.
If you decide to go down the investment fund route rather than picking your own shares to invest in, the fund management industry has come up with a way of trying to help you choose the level of investment risk you will be comfortable with.
You will be presented with a range of different portfolio options with names like, ‘cautious’, ‘balanced’ and ‘adventurous’.
I’ve written in the past about how misleading these descriptions can be.
Any managed portfolio that tries to reduce ‘risk’ will invest in bonds, a form of investment whereby you are lending money to governments and businesses in return for a fixed rate of interest.
There are two problems with this type of investment. Firstly, there are periods where bonds do not have a good track record of beating inflation. Secondly, there are times when bonds can still be very risky. If you measure risk by volatility. Look what happened to the UK government Gilt sector when inflation took off and interest rates started to rise towards the end of 2021.
Any time you add bonds to your portfolio you are just leaving returns on the table.
A crazy product that has come to the market in recent times has been something called ‘lifestyle’ funds.
This investment strategy automatically invests for you. The younger you are the more it will invest in global shares. However, as you approach your nominated retirement age it will automatically reduce your investment into shares and buy lots of bonds. This is crazy. Not only are you giving yourself a really tough fight against inflation in retirement you may miss out on some of the things you want to do in retirement.
How would you have felt if you retired with your ‘lifestyle’ investment fund back in 2021 when bond funds crashed?
Yes, investing in global shares will be volatile. The price of shares changes daily and sometimes the market mood will be up and sometimes it will be down.
Unfortunately, when it comes to investing, risk and reward go hand in hand. You cannot achieve great returns without an element of risk.
But if you believe in great businesses, over time the profits of these great businesses should drag the prices up.
If you genuinely don’t have the stomach for the volatility of investing in shares then you could build in more security to your retirement by using some of your pension to secure a lifetime income, perhaps just for the essential bills. That way you know that if you made some bad choices and your investments didn’t work out, you would still be able to afford to live.
A collection of stocks for your pension money
Now we know why we need to invest we can start looking at the type of share portfolio you might want to build.
It’s important that as you approach retirement you have a financial plan in place.
You need to be clear on the type of life you want in retirement as you can then align this with your investment goals.
The type of life you want can be costed and then based on the money you have saved you can work out what sort of investment return you need. Just don’t forget to factor in inflation.
When it comes to deciding on your investment strategy or share picking strategy in particular, the internet is full of different ideas.
There are those that focus on value investing whereby they want to buy companies when they perceive them to be cheap.
Others will only invest in small companies believing they have the potential to grow more.
Some like dividend income from their shares and invest into larger more established companies that pay regular dividends.
A lot of investors will spend much of their time trawling through the financial statements of companies and analysing lots of companies using all sorts of accounting metrics.
This can suck up a lot of time and unless you find real enjoyment in this process you will probably give it up quite quickly and be back to square one.
One of my favourite share picking strategies is to pick the companies you buy from every day.
I call it the ‘Everything I use’ portfolio.
For example, if I think about my typical day I will wake up and check my Apple iPhone and then maybe go for a run with my Apple AirPods listening to music on Spotify.
When I start work, I will check my emails via Microsoft Outlook, then use Word to start writing content and excel for analysis work.
I will research via Google and then upload my videos to YouTube.
If I need something, the majority of the time I will buy from Amazon using my Mastercard.
If off for an evening out I will get an Uber taxi.
So already there I have listed seven companies.
- Apple
- Spotify
- Microsoft
- Google (Alphabet)
- Amazon
- Mastercard
- Uber
Now I know you might be thinking, well that’s a bit boring, most of those are the big tech companies that everyone invests in.
Yes, you are right however if you hold these shares in a fund you are also holding a couple of hundred or even thousands other shares that you might have no clue what they do.
I’m a great believer in that you should only invest in something you understand.
You understand the products and services you use every day and you know if they are great businesses because if they are not then you wouldn’t use them.
Think of all the money you have paid out to the companies that you use every day. Isn’t it a good idea to be a part owner of these businesses and get them to start paying you back?
To give you an idea of how the above portfolio has done over the last four years I have used the back testing tool from Portfolio Visualizer.
I have equally weighted the above seven stocks in the portfolio and compared the portfolio to the S&P 500 index which is an index of the 500 biggest US companies and a proxy for the global stock market.
The ‘Everything I use’ portfolio has delivered an annualized return of 19.96% over the last four years compared to 13.53% for the US market.
I have purposely kept the time period for comparison short, so we don’t factor in recency bias. Also, Uber shares were only listed in 2019 and Spotify in 2018.
If we were to take Uber and Spotify out and go back ten years, we can see the results are equally impressive.
Of course, you might have different products and services you use and you might be able to think of a few more companies to add to your own list. For example, the supermarket you regularly shop at, a particular food brand or the car you love driving.
The list can go on for quite a while.
What I would say though is that it is better to restrict your portfolio to a smaller rather than larger number otherwise you are going to start to dilute returns and it will become harder and more expensive for you to track everything.
This is one of the reasons active fund managers struggle to beat the market over the long term. They are diversified into too many stocks mainly because as they grow to a larger amount, they have to find more and more companies with shares available to invest in. Also, financial regulators usually limit the amount of money a fund can hold in one company.
The ‘Everything I use’ portfolio is not a set and forget portfolio. Whilst simple to comprehend you will still need to keep a check on these businesses to see where they are going. It could be that you stop using particular products and services and replace them with different ones. The idea then being that you replace your shares with new businesses.
You don’t need to review the portfolio day by day, but you do need to review it on a regular basis that suits you.
Please remember the purpose of this article is not to give you advice. I am just suggesting an idea for you to consider. You still need to do your own research to decide what is right for you.
The less shares you invest in will always increase the risk level for your portfolio as remember companies can go bust and you can lose everything. The more companies you hold the less chance of them all going bust.
Past performance is no guarantee of future returns which is why you need to keep an eye on things.
Hopefully this article does give you a different way of looking at investments for your pension money. Especially if you want to be a share picker without getting bogged down in the nitty gritty of company accounts.
I love this type of portfolio because it’s simple and just makes so much sense.
If you would like to stress test your retirement plans or even to get a plan in place then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
