As you edge closer to retirement, how should you adjust your portfolio?
Lifestyling is one of those investment innovations that appears to make lots of sense, and on closer inspection actually does make a fair degree of sense.
But it isn't for everybody.
The word lifestyling conjures sleek images of Sunday colour supplement fantasies or urban lifestylin' hip hop dudes, but I'm not the man to ask about that. I only know about the pension kind of lifestyling. That's how cool I am.
Under lifestyling, pension companies steadily shift you out of equities and into safer investments such as cash and bonds in the five years before you retire. Typically, they shift 20% of your equity holdings into cash and gilts every year, gradually limiting your exposure to a stock market crash shortly before you collect your gold clock.
I don't know why they call it lifestyling. The name it doesn't quite work, although I can't think of a better one. And probably, neither could they.
Do it in style
It is easy to see the merits of lifestyling. Say you were due to draw your pension fund on 1 March 2009, and remained fully invested in the stock market right up to the last minute. Without lifestyling, the value of your equity funds would have been cut by one third during the last year of your working life, and so would your pension income.
Your mood might also have dipped as well.
Imagine you had been lifestyling instead. Instead of falling off a cliff, your pension pot would have floated comfortably to earth on a cushion of bonds and cash. You would still be feeling some pain, particularly with annuity rates plunging to all-time lows, but lifestyling would have taken the edge off it.
Computer says no
You've already spotted the downside. Say you are due to retire in March 2014. In March 2009, with the FTSE 100 crashing to around 3,500, one-fifth of your pension fund would have been shifted into some rotten cash account paying 0.75% or a bond yielding 4%.
This means you would have been shunted out of equities right at the bottom of the market, crystallising your losses forever. Over the next 12 months, share prices rose 66%, and 20% of your fund will have missed the fun.
Computer says no to that feisty stock-market rebound.
What a shocker
It gets worse. Today, 40% of your pension fund will be out of the stock market, rising to 60% from next March. Although the future for markets remains uncertain, would you really want to shift 60% of your money into cash and gilts now?
I certainly wouldn't.
True, if stock markets retreat, you will be protected. But at this stage of the economic cycle, I would rather be moving into shares than pulling out of them. Especially with some analysts claiming we are reaching the end of a massive bond bubble.
Lifestyling does shock-proof your pension, but only against one type of shock. In return, you have exposed yourself to another shock. And that's why I don't trust it.
Lifestyling needs to be made more responsive, and Fidelity Investment Managers is giving it a go. Its new Futurewise product retains the freedom to shift investor funds between different asset classes, in response to changes in market outlook. This is certainly a step up from simply switching your money from stocks into cash and bonds as you get older.
I suspect others will follow.
Be old, be Foolish, be happy
Lifestyling is fine, if you want the easy life. But those of us who prefer to live Foolishly should be able to do a little bit better than that. Timing the market is always dangerous, especially when you are just a few years from retirement, but if you have a large pension pot, and are comfortable with risk, you may appreciate the flexibility of doing it yourself.
Especially if you plan to leave much of your pension pot invested after you stop working.
Lifestyling may prove less relevant in future. Your retirement date is no longer written in stone. It might get pushed back, or you might go part-time, or find a job meeting and greeting customers in Asda, like the cheery pensioners at my local superstore.
Given today's more flexible lifestyles, lifestyling may soon look completely outmoded.
Check what boxes you have ticked on your pension plans. Maybe you set up your scheme several years ago, and chose lifestyling as the easy option (as I did). If you're a bit more Foolish these days, you might want to rethink your plans. Some insurance companies allow you to make changes yourself, online. Others may charge a small fee.
Alternatively, you could maintain lifestyling for a chunk of your pot, and handle the rest yourself. That's what I'm doing. Several years ago, I clicked the lifestyling option on my Standard Life pension plan, which is worth about 12% of my overall portfolio. I'm standing by a decision for now, in the name of balance.
But for the rest of my portfolio, I hope to handle my money with a bit more style.
More from the stylish Harvey Jones:
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