I am 53 years old and wondering what investments I should go into. I have about one million dollars in the bank after an en-bloc sale, and would like to ensure that I have enough to retire with, and enjoy my passion for photography and travelling. I am currently employed in a senior management position and work is just a means to pursue my passions.
I am wondering why you’re writing to me… after all, you are in a position that everyone hopes to be in, and you are working for your passion rather than for a living. So there is nothing much I can say that I am sure you already know. But, I shall respond to you just the same. But there is one caveat; I am no investment advisor, nor am I a financial planner. Hence, whatever I say in this post cannot be constituted as advice which you should act upon. I can share some ideas to answering your question, but you would have to seek professional advice when it comes to investing your money.
That said, our strategic thinking protocol does allow people to think about this question and point them in the right direction. So here goes… the strategic decision making protocol with respect to making the right investment decision:
1. Your intent
If one had $1M in the bank, and assuming you can earn 4% on the principal, that would yield you $40,000 a year. That works out to be more than $3,300 a month, ad infinitum. Not bad, depending on what your expenses each month are! Yet for others, that is only chump change; they will need no less than $15,000 a month just to scratch a living. Hence, what I am saying is that you need to be clear about what you are trying to achieve with your investments - to keep up with your current expenses or to enjoy a scaled down lifestyle? You would obviously have to do some assumptions, and scenario building, but ultimately, answering this question with certainty is key.
2. Thinking in time
Your past actions will dictate your future performance. If you are a spendthrift, and cannot resist the next Prada, or Hugo Boss, sale, then you might want to think about how to keep the money out of your hands. If you are a very disciplined investor, thinking about the long term and can “fire-and-forget”, then you can manage your own money well. The key, I suppose, is looking at how you have been dealing with money all your life, and using that as a basis to make this decision. Don’t assume that you will change your habits because of this; after 53 years, you most likely won’t.
You have already listed a couple of constraints: your travels and photography. I suppose your level of expenses is another, as should be your other lifestyle choices. Family commitments are yet another. Each of these constraints would probably have a dollar value to it, and when you add all of them up, putting in a certain factor of safety, that might become your total dollar-value constraint. Yet there are more, like your risk appetite. Remember, a constraint is a necessary condition for a successful decision, not a hindrance to your situation. Take some time to identify all your constraints.
4. Systemic solutions
After you have done all these, you might now like to look at the holistic situation and see how that will impact your decision. Identify all the drivers that will push you to making the right decisions for your retirement investments, and those that will pull you away from them. For example, a lack of investment savvy will certainly be a negative driver, while having a long time horizon (say 15 years) may be a positive driver. Identify all the drivers pertaining to you and your situation, and then categorise them as “reinforcing” or “hindering” drivers. Connect these drivers together, identifying which leads to which. You would have therefore created a system map that would allow you to identify the centre of gravity (COG) of the situation. The COG could well be a negative one, and that means that your decision would have to overcome that driver. You might also have a positive COG in the works, and that means that you can use that to overcome the negative COG. Understanding your COG will then understand what you need to do to sustain your decision.
5. Balancing options with constraints
At this juncture, you should have identified all the different options open to you: investing in property, in corporate bonds, in treasury bills, in stocks and options, in future, or in an exchange-traded fund. Each of these instruments has a different risk, a different potential payoff, a different management strategy. By balancing your options with your constraints, you can narrow down what best suits you in terms of the instruments to invest in.
6. Manage risk through scenario thinking
Finally, there will no risk-free instrument unless of course you just want to stay above inflation (or, sometimes, below it!) You should therefore test your resolve with the more favoured solutions you have identified by subjecting your assumptions to the best-case and worst-case scenarios. By doing this, you will be able to test the variability of your decision and also the limits of your risk. If you can accept the downside and not be affected by it, then perhaps that would be the investment instrument to take. If not, then you might have to hedge your bets and create a more balanced portfolio. After all, there is no 100% fail-safe investment.