How To Lifestyle Your Portfolio

Published in Investing on 29 October 2010

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.

Lifestylin'

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.

Future proofed

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.

Style counsel

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:

>  Take control of your retirement funds with a Motley Fool SIPP.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

curedum 29 Oct 2010 , 3:53pm

Doesn't it depend both on your attitude to risk and your time-frame? In the last year or two before my intended retirement, I put new money into cash and also moved my accumulated private pension into cash. I retired on March 2nd, 2009. DIY Lifestyling worked for me.

But I'm not that bl**dy clever... I bought a conventional annuity with the bigger of my funds, instead of choosing income drawdown!

Ah well....

jaizan 29 Oct 2010 , 10:07pm

The article is about lifestyling your PORTFOLIO, which surely does not have to just include the pension fund.

ISA lifestyling: Just move towards stocks with a decent yield to provide income to live on.
PENSION: If you are near the point where you get forced to buy an annuity, try to take advantage of any market strength to reduce equity exposure.
To me, annuities seem like a rotten deal, compared with holding dividend paying stocks.

nuages0 31 Oct 2010 , 10:11am

It's clear that the author does not fully understand the reasons for lifestyling within a pension fund at least. It's true that the process gradualy takes you out of equities into less volatile bonds & cash, and that can be a two-edged sword.

But what it also does is to buy assets which match the lump sum & annuity which the majority buy on retirement. For example if you were to retire today, you would find that annuity rates are quite poor. But if you had been buying bonds for the last 5 years, then you would have made considerable profits on them to compensate for the poor rates. In other words, lifestyling assures you of getting something like the mean annuity rate over the period.

Luniversal 01 Nov 2010 , 2:03pm

Isn't it possible that switching around 'easily' between asset classes in the few years' run-up to retirement could whipsaw you as badly as most punters who try to hop from share to share within a portfolio: often overtrading and coming out less well than the LTBH hibernator, while endowing the Wise with commissions?

Harry Browne's 'Fail-Safe Investig', aka the Permanent Portfolio, proposes a desynchronised asset allocation-- simple, low-cost-- which rebalances mechanically only to maintain the fixed proportions, yet appears to have coped with most conditions for quite a while. ETFs make it cheaper still to run.

luccombe 03 Nov 2010 , 7:16pm

it seems to me that lifestyling might have been suitable 20 or 30 years ago but with current life expectancy we are told retirement will probably last into one's 80's, with a 20 year retirement possibility the best option is to stay invested - as you often tell us the market grows on average at 7% annually so will quadruple over 20 years. seems to me one has to stay in there and use some of the 25% tax free cash as a way to smooth over poor years. 20 years is just too long a time period to be stuck with a one time "safe" decision

chasbmw 05 Nov 2010 , 3:51pm

I have just been working the figures on a Sipp portfolio run by Standard life with unit trust investments mainly on a fund of funds basis.One of the funds is a F&C lifestyle fund.

Figures are based on an annual return of 6% and inflation at 3%.

Total fees over the next 10 years = £170K on an investment of £450K. The return is some £26K and if the return is adjusted for inflation then this turns into a loss of some £95K.

You need to run the figures, taking into account all fees as I find the level of rip off amazing.

chrisfoxinc 10 Nov 2010 , 9:49am

This analysis is misleading. A more proper analysis would be to test a lifestyle strategy against a non-lifestyle strategy over each (for example) 5 year period over the last (for example) 20 years, and see which strategy performed best on average. This stops you cherry-picking a period to prove a point. I recall doing this some time ago, and I am pretty sure I recall a result showing a significant reduction in risk for a marginal reduction in performance on average.

The other factor to consider is what the money will be used for. If your plan is to annuitise a pension pot at a single point in time, then a relatively simple lifestyling strategy may work. However, given that you can stagger annuitisation, take tax free cash, or just have a a portfolio outside of a pension, a more sophisticated level of asset liability modelling may be required.

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