Martin Hawes: Feel the fear

It's best to be cautious when investing for retirement.

Opinion

Few of us ever get much practice at investing lump sums. Most of us invest only small amounts - perhaps the surplus that we have each month, occasionally a bit more, but generally only in a routine way like a KiwiSaver account.

A few may at times get lump sums (such as an inheritance), but this is usually paid off the mortgage and not invested.

The time that most of us have lump sums to invest is when we retire - we sell the business or farm or cash in our superannuation.

At this time we end up with quite a lot of cash - usually the biggest sum of money we have ever seen - and have to invest it to get the income that we need. We are completely dependent on the investment of that lump sum: it will effectively provide our "salary" for the rest of our lives.

This lump sum is not a rehearsal: one mistake and life changes forever - for the worse.

The word "scared" most accurately describes the feelings of the newly retired. They have sold the business or stopped work and moved into the unknown of no longer having any form of regular income. They are right to be frightened.

In most people's minds, the fear is heightened because of what has happened recently on the markets - shares and property are unreliable, corporate bonds have risks and the only "safe" haven - the bank - is offering a pathetic level of interest, not enough for most to give the income that is expected.

I have two pieces of advice for clients with lump sums. The first is to do nothing. Put it in the bank and develop a plan. It is true that you should be getting better returns than bank deposits, but this is not a time for haste.

Leave your money in the bank while you think about what to do. Test your thinking with others and take advice when necessary.

When you do start to invest, drip-feed your money into the markets over a few years (think of this as practise with small amounts). This is called dollar cost averaging and I have written about it before.

The fear that you feel will subside and your confidence will grow as you make small investments into the markets.

Second, diversify well. Diversification may not have got you your money, but a diversified portfolio is the best store of wealth ever devised. This means avoiding the temptation to put all your money into, say, fixed interest bonds and, most importantly, getting some money into offshore investments.

Investing your lump sum will be scary because ultimately there is no such thing as a perfectly safe investment - you have to accept some level of risk.

Good planning will take a good bit of the risk out of the process, but keep in mind that you will not get a second chance to invest a lump sum.