Get rich before you retire – afterwards it’s too late

No magical mix of investments will propel you to great wealth in retirement. You get rich before you retire, not afterwards. Because a sudden and substantial increase in net worth cannot be achieved through investment without sizeable risks – and the vast majority of retirees simply cannot afford that level of aggression.

The view comes from Barnard Jacobs Mellet Private Client Services (BJM PCS), a specialist adviser to high net worth individuals and an advocate of prudent lifestyle decisions to support astute investment choices.

Retirees who enjoy acceptable living standards have usually made two key decisions before considering their investment options – the decision to live within their means and pay off debt.

“The sooner those decisions are made, the better the prospects for retirement,” says Jurie van der Merwe, a senior wealth manager at BJM PCS.

Wealth mounts when cash stops leaking out. The main drivers are then the timeframe (the longer the better), the size of monthly and annual commitments and the selection of a well-qualified wealth manager.

“The value added by a knowledgeable professional should not be underestimated,” notes van der Merwe.

Time rapidly becomes decisive because the longer the timeframe to retirement the greater the potential recourse to growth assets like equities – a volatile asset class, but one with proven inflation-beating capacity.

The extent of short-term equity risk is highlighted by recent experience. The JSE peaked around 33 000 points in May 2008 before plunging to around 18000 points in November. However, since March, the JSE has moved 25% higher, and there may be more growth to come.

“We see client inflows into equities; directly into shares by wealthy clients, but also into unit trusts and exchange traded funds. A 25% gain is substantial, but other emerging markets such as Brazil, Russia and China have strengthened even more, suggesting we have some catching up to do.”

Clients who had previously beefed up their cash positions appear to be inclining toward long-term growth. Property – the other major growth asset – is also receiving attention.

Van der Merwe adds: “Typical diversification for a moderate investor aiming for a comfortable retirement would be 40-50% in equities, 20-30% in property, 10-20% in bonds and 10-20% in cash.”

“Stay in cash and you lose out in the end through tax and inflation. Interestingly, some conservative investors are moving from cash into income funds holding longer-dated corporate bonds as a way of locking in favourable rates.”

Diversification across domestic asset classes is usually complemented by offshore allocations, especially at times of rand strength.

“We generally advise a balanced mix across various geographies, Asia, Europe and America, with perhaps a tilt toward a specific theme – perhaps energy or Asian growth,” says van der Merwe.

Though reviving interest in equities, offshore or on, might be interpreted as increased appetite for risk, one investment area has been slow to recover from the market shocks of the past year – leveraged instruments.

“Leverage through contracts for difference (CFDs) and single stock futures can be used by sophisticated investors to take a market view and balance risk,” says van der Merwe, “but would rarely be used by someone investing for a secure retirement.

“Leverage to optimise potential gains was not unusual a year ago, but today’s market mood is fundamentally different. Investment is not a get-rich-quick scheme. It takes time, discipline, diversification and sound advice. Get rich slow before you retire, but give yourself sufficient time and you will have enough money for the rest of your life.”