Focus on how the world is likely to change in the decades ahead but also acknowledge how uncertain that future isby Duncan Weldon / March 2, 2019 / Leave a comment
Almost by definition, when you’re thinking about pension saving you should be thinking long term. But how long, exactly? As Keynes quipped, in the long run we’re all dead, so there is a balance to be struck. While constantly checking the FTSE 100’s closing price and always trying to catch the “next big thing” is not a sensible route to a comfortable retirement, an “invest and forget about it for decades” approach is almost as cavalier. Keep an eye on the distant horizons of the global economy for sure, but do keep checking that things are evolving as you expect.
Before we get to that though all the basic investment rules apply: be realistic about return assumptions, make sure you are saving enough, take note of costs and spread yourself across asset classes and regions. If there is one reliable slow road to riches, then it is compound interest. And insofar as there is a golden rule, it is simple: start early. Someone who invests £100 a month between the ages of 20 and 29 and lets it grow is likely to have a larger pension pot at the age of 60 then someone who saves £100 between the ages of 30 and 59. And whereas those about to retirement will need to play it safe, the younger you start, the more freedom you’ve got to take a punt on bets that might take a while to pay off.
A lot can change in 30 years. Back in 1989, the Chinese economy (accounting for inflation, differential prices and exchange rates) represented just 4 per cent of the world’s GDP as against 22 per cent for the US. This year, according to the IMF, China’s share will be 19 per cent and America’s 15 per cent. Only one of the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), which have dominated recent US equity returns, existed in the late 1980s. In fact, back in 1989 eight of the world’s most valuable 10 companies were in the still hot and fast-growing Japanese economy, as compared to none today.
An attempt to match investments to the shape of the 1989 world economy would have produced poor results by 2019.…