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Don Ezra on a retiree quandary: handling growth
Don Ezra, a now-retired celebrity adviser in the institutional world, still offers his views, in blog form, on all sorts of issues facing retirees. Recently, he turned his attention to the possible growth stock bubble.
In his series ‘Life after Full-time Work’ (link) Ezra admits that no-one knows when, nor if, the current record spread between growth stocks, such as the big technology winners, and value stocks, such as banks and energy companies, will turn back to value’s favour. For most self-funded retirees this is a question of rebalancing portfolios to maintain diversification. But what if you receive an additional pile of money to invest, from a bequest, for instance? Behavioural finance studies say we will treat unearned income, especially windfalls, differently from our other savings. We will tend to take more risk with money from unearned sources.
But Ezra puts that aside and looks objectively at the options for a retiree, going through the sort of thought process expected from a professional investor. In his time at Russell Investments in the US, Ezra was a popular speaker at Australian conferences for super funds and other institutional investors, such as the annual CMSF and ASFA conferences.
His conclusion is that the decision taken by retirees in this situation is very similar to that taken regularly by big super funds whether or not to hedge their significant international exposures to currency moves, and by how much. His discussion is also a good exercise for all retirees to undertake, irrespective of whether they are investing earned savings or unearned.
Ezra, 75, grew up in India and studied in Kolkata (formerly Calcutta) and Cambridge, USA, with degrees in maths and economics. He is a qualified actuary, who has worked in the UK, Canada and the US, including 26 years at Russell headquarters in Washington state. He now lives in Toronto.
Ezra split the subject into three paths of approach: to treat the new-found cash separately from other assets; to view it as part of your decumulation pot of super and/or pension; and to view it as not affecting you financially, therefore giving you more freedom in the matter.
- With the first, standalone, approach, you could either invest aggressively by, say, investing it all in growth assets, or conservatively, say in cash. If the share market corrects, as is widely tipped, you will lose money. If it doesn’t – maybe this time it really is different – you’ll be a winner. You can attempt to dampen the regret from losing by drip-feeding your investments in growth or averaging your entry costs.
- With the second, more likely, approach of treating the new money as you do your current retirement savings, you then have to decide whether to re-balance the new money in line with your current growth/defensive mix or allow the new cash to push you lower down the growth scale.
- With the third and probably least likely approach, where you view the new pile of cash as play money, you can choose whatever makes you happiest, including your own goals about what to leave to others.
Each path involves an assessment of possible regrets and therefore whatever decision is taken is an uncomfortable one. But Ezra says that one of those frameworks to think about or discuss should incline you to a decision which makes the most sense. A key element seems to be, not only your existing financial arrangements but also your attitude to regret.
