Equally abundant are the warnings. “Know your appetite for risk,” financial advisors reiterate. “Past performance is not necessarily indicative of future returns,” we are told, almost to the point of parody. “Investments should be made with a long-term horizon in mind,”
This last maxim – perhaps the bedrock of financial planning – appears to advise those aged 50 and over against investing in the stock market. You may have the resources but time is against you. Sorry, sir, you’re too late.
It’s a concern that Laith Khalaf, a senior analyst at wealth management giant Hargreaves Lansdown, has heard from prospective clients time and again. It’s also, he says, a misnomer.
Invest for a minimum of five to ten years
“It’s true that the longer you invest in the stock market, the better,” he says. “I would suggest a minimum of five to ten years. But if you’re 50, that’s a realistic timeframe.”
Hargreaves Lansdown sees many new clients over 50. It shouldn’t be particularly surprising. By that age childcare and mortgage payments are dropping away, while earning power can be at its peak. More discretionary income is to hand.
“People tend to take control of their finances later in life,” Khalaf says, even if “it’s not necessarily the way it should be”.
Securing your financial future is, of course, the aim. Yet, though retirement is edging closer, it’s doing so without the haste seen by previous generations.
“A man who reached the age of 50 in 1981 could expect to live another 29 years, and by 2014 this has risen to 36 years,” says Joanna Fowler, Saga Personal Finance’s head of wealth.
“Therefore, over-50s should not just simply look at getting a quick return from the stock market, they should look at structuring their investments to deliver income and provide growth over the long term.”
So you’ve decided to take the plunge. What next?
“Unless someone has both investment knowledge and a long-term interest in investments, they are likely to be better off engaging a financial adviser,” says Prime Time Financial principal Peter Lawrence. He advises against using a stock broker unless “you know exactly what you want to invest in”.
Khalaf breaks the decision-making process into three key steps.
How much do you want to invest?
“If you’re starting out aged 50 or more, the prospect of investing in the stock market can be relatively daunting,” he says. “How much can I really achieve? If this is a concern, you can start out small and build your portfolio.”
Some wealth managers allow for minimum investments of £25 per month or lump sums of £100. However, most financial advisors suggest that £1,000 is needed to see meaningful progress.
As Fowler says, “the amount you should invest and how long the investment should be for will depend on your individual circumstances”.
Fees also vary significantly. Brokers tend to charge about 0.3% to 0.6% per annum. The fee for advice, meanwhile, depends on the type.
Guidance on maximising a pension will be straightforward, whereas factoring in additional complications, such as a trust fund, will likely cost more. Minimums of about £500 or 1 per cent can be expected, says Khalaf.
Steps two and three are intrinsically linked. Determining the level of risk with which you are comfortable will, in turn, dictate the type of investment – or product – you choose.
You can make trades yourself, or buy into a fund, from simple tracker funds to riskier, more expensive, but potentially more profitable, actively managed funds.
“It might be that initial discussions reveal a mismatch,” says Khalaf. “The investor wants to achieve X returns but is only willing to work with Y risk. A compromise then needs to be found.”
Money management fees
Additional fees for fund management break down into upfront and ongoing fees. The UK’s Investment Management Association (IMA) lists the typical u-front fee where charged as up to five per cent. Ongoing fees, it says, are typically between 1.25 per cent and 1.75 per cent a year.
Simpler funds, such as tracker funds, whereby a portfolio aims to replicate, or track, the gains of a particular stock market index, like the FTSE 100, charge less.
However, if you want ‘outperformance’, or profit above the gains of an index, expect to pay more for actively managed funds.
Performance fees are rare. According to the IMA, less than 100 out of a total of about 2,500 UK funds have one.
“Ideally people should spread their money across a mix of stocks, bonds, investment funds and cash deposits,” says Fowler. “Generally, it is advisable to move money into ‘safer’ investments the closer you get to the point in time when you actually need to use the money.”
Hargreaves Lansdown is seeing an increase in the number of ‘DIY’ investors. “People have more resources available to them now compared to ten years ago,” Khalaf says. One-to-one advice can be costly, but with all the information online, “investors with moderate portfolios are increasingly choosing to go the DIY route”.
If you are doing it yourself with limited knowledge then the New ISA, or ‘NISA’, is a good place to start, says Prime Time’s Lawrence, as it provides some tax advantages.
Additional options via pensions are highlighted by all the advisors we spoke to, as are upcoming changes to UK pension legislation. From April, pension owners aged 55 and over will be allowed to redeem their entire pot as a cash lump sum.
“With the latest changes announced in the last Budget there is increased flexibility in how you take pension benefits,” Lawrence explains. “But that flexibility needs to be used carefully, since you don’t want to run out of money by the time you are 70.”
Another factor to consider is whether health issues can help to increase income in retirement, Lawrence adds. Annuities still have their place, and ‘enhanced annuities’ in particular can pay more if there are health concerns.
With interest rates at 0.5 per cent and inflation around 1.5 per cent, the value of money is effectively going backwards in real terms.
“People think about stock market investments in terms of risk,” says Khalaf, “but what they don’t consider is the risk of not investing.”
Investing in the stock market isn’t for everyone. The bottom line, though, is simple: If you do decide against it, make sure it’s for reasons of risk and resources, not age.
“Soon, the age of 50 will only be halfway through life for an increasing number of people,” Lawrence notes, “so there is no reason to think that it’s too late to invest.”