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Holly Cook: While at the London Stock Exchange recently I caught up with Justin Urquhart Stewart and asked him how asset allocation should change during different life stages. Let's see what sort of portfolios he prescribes for different investors.
Justin Urquhart Stewart: If I'm [an investor] at the start of my career—sadly I'm not, I’m at the wrong end of it—I would be looking at taking a more aggressive stance. So I'm willing now to take a greater position in equities on a global basis. And to me that's going to be 60%, 70%, maybe even 80% in equities. I’m willing to take that longer term view and take the hit of the season of storms as it goes up and down, because I'm not looking this year, I'm looking five, ten years a hence. But I would also have, within that, I would have my mining exposure, my minerals; I also make sure I’ve got other exposure to some property; and other soft commodities as well; and a small element of fixed, but I don't need very much.
As I get older, then I'm still going to be having a significant proportion [in equities] and to me a balanced portfolio for the middle-aged individual is probably around about 40% in equities. And I’ll be slightly overweight that at the moment. I’m going to be having some corporate bonds, probably avoiding the more obvious gilts and treasury bonds because they’ve been chased far too far, those yields have been stretched so much, they may even get stretched further, I just don't want to go there, someone else can take that pain for me. And then again having that broader range of asset classes to give me that balance, because as I get older I want greater predictability, I want lower volatility. But as an investor over the next few years, a longer term investor, one of the most important things I would look at is cost. I must be stripping cost out. I don't mean annual management charges or just commissions but that whole total expense ratio. I want that coming down significantly lower.
Cook: So you’ve touched a bit on your middle-aged investor. How about when you're getting closer and closer to retirement, what sort of asset allocation proportions are we going to see there?
Urquhart Stewart: Well, there you probably don't necessarily want to have such a high proportion of your equities because that's giving you a higher level of risk. Having said that, there are quite a few good defensive areas in equities, so you’re not out altogether. Then you are moving to something which is giving you a greater level of predictability in terms of the returns you're getting up until that time when you're going to retire, if you take your pension, if you're going to buy an annuity or something like that.
But these days if you're older, if you're retiring at 60, 65, you’re going to be around for another 45 years. So, don't sit there and plan for sort of five years and then popping your clogs. No, no, actually you're going to be keeping your risk profile going a lot longer than that. So, even at that era, I would still expect to keep a reasonable level of equity exposure—40%, until I'm getting in my 70s and 80s, then I start pulling that back; I want greater certainty and having something closer which is to closer to cash-style products giving me that instant access that I might need.
Cook: So, potentially, this sort of traditional idea that in retirement you're all in bonds or you’ve bought your annuity and equity investing just isn’t for low risk investors, actually is a bit of a myth?
Urquhart Stewart: It's changing because our lifestyles change. On the basis that most of us are going to be centenarians these days, by the time we go, we’ll probably be gagging to go! But in the meantime we've actually got to try and make sure for the last 30 years we don't only just have money but that money is still increasing in value because we’ve still got demands on it. And so, I don't need something which is becoming a static or a wasting asset. I'm willing to take a level of risk. What you just need to do is have a flight path down in that risk as you get older. So, by the time you do get to your – become your centenarian, your telegram finally turns up if we still get one these days, then you're right, you’ve probably got a very small proportion in equities.
Click here to watch Part 1 of this interview, Urquhart Stewart's Lessons from the Crisis & Outlook for 2013.
