Your pension is the most important financial decision you will make in your lifetime. Yet while we might spend hours researching and choosing a new TV, pensions are just too damn boring. Either we do nothing...or we fall victim to the hard sell. Even investment industry professionals -like me - fall into the same traps. Having recently worked for a couple of very long term institutional investors, I decided to follow their lead. Here are three simple lessons that will pay real dividends in your retirement.
First, start early and think long-term. We all know this in theory but in practice early-career savings are limited - we prefer our large mortgages, nice cars, and the other "trappings of success". While housing has been a good investment (in the past!), the rest just leaks value. But early-career savings count, thanks to the magic of compound returns. Don't wait till the kids have left home and you have more disposable income - by then your earnings may have plateaued or, worse, a robot may be doing your job. Start now!
Second, think equities. The financial industry has created a vast array of financial products but many of these are just re-packaging of existing investment types but with higher fees. Real companies are what grows the economy. By investing in their shares, you get a slice of that GDP growth. Yes, you can buy other asset classes as a diversifier: corporate bonds will give you some of that company exposure at lower volatility but lower returns; gold is a safe haven but it doesn't produce any income; and currency trading is a great way to lose money. Equity returns can be volatile, but if you're investing for the long-term (see above) you can ride out the volatility, reinvest the dividends and collect your share of the growth in the economy all around you.
Third, costs matter. Big time. Everything your financial adviser tells you is uncertain, apart from his fee. The cult of the "star fund manager" makes mugs of us -while statistically some managers will beat the market by luck alone, "survivor bias" makes sure these are the ones you read about. Even if you believe in manager talent, star managers attract lots of money to manage, which makes it much harder to deploy those funds in the kind of interesting niche opportunities that made them good in the first place. You'll be very lucky to "beat the index"in the long term, so you'd be better off in low-cost index tracking funds. And while you're managing down your costs, check the pricing of your investment platform (fund supermarket, ISA / SIPP provider or whatever) and shop around.
If you invest £100,000 for 30 years and equities return 5% per year, and you're paying 1.5% in fees, you'd end up with £281,000. If you reduce your total investment costs to 0.5% - and you can - you'd end up with over £375,000, i.e. 33% more. That's a lot of Saga holidays to look forward to.
Talk to your financial adviser if you have one - but now you know what questions to ask!