How to START RETIREMENT PLANNING - Understanding Asset Cycle

Planning for your retirement is a journey. This might be the first time you won’t be getting a monthly salary to budget and meet your needs. This is why it’s important to start your investment journey as soon as possible. It is crucial to have a strong foundation of investments to generate regular cash flow for when you retire.

Many believe that your investing journey is complete once you hit your retirement age, but that may not be true. Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money. At this age, it is important to efficiently distribute your investments across various asset classes. There may be many “rules” you may have read about out there such as the age-based rule of thumb but individual requirements are unique and therefore need to be curated accordingly.

Retirment is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.

This is when you kick back, relax! It is not a period to pinch pennies. The reason you’ve worked so hard and accumulated all this money is to spend it now! This is why it is important to have your finances sorted so you don’t have the additional burden of having to make your ends meet. So, from a young age, it is important to understand these asset class cycles so you make wise decisions, and when you begin to reach your retirement age and your income stops, you can continue to live with pride without compromising on your living standards.

Before you invest, however, you should sit with your financial advisor and understand the nature of these asset classes. It is imperative to understand where your money is being invested and understanding how these instruments behave over a large time horizon is a part of that process. The markets that you invest your hard-earned money in are governed by several factors. Different asset classes behave in different ways at various stages of the economic cycle, this plays heavily into the importance of expert asset allocation.

The most common assets that are invested in are equities, bonds, commodities, and real estate. Each of these has its own cycle which may last between a few months to a few decades. Understanding these cycles, by looking at how these assets have performed in the past can help you greatly in when to put and more important, not put your money in them.

The biggest problem that you may face is if you find yourself at the wrong end of the cycle, you could potentially see no gains for a very long period of time. If you invest at the very peak of the cycle, you would have to wait for an entire circle just to see some gains, and depending on the asset class this could be years!

Another very important aspect that governs portfolio construction and diversification is the correlation between different assets. Correlation between assets is a number between -1 and 1. A positive correlation (between 0 and 1) would mean that when one asset class return increases the other asset class return also increases. The closer to the '1' correlation, the higher the correlation. A negative correlation would mean that when one asset class return increases the other decreases. A correlation of '0' means no correlation and a '-1' indicates a perfect negative correlation.

When investors are building a portfolio, asset classes with negative correlation or no correlation are most desirable. This is because if one asset class drops during a market downturn, the other asset class will either rise or be unaffected.

Cycles are hard to find and must not be used as an actual science but they can be a very helpful tool in understanding the nature of these investment instruments. These cycles help in showing a historic pattern of how these asset classes have behaved during the various periods of the economy putting together your knowledge of asset cycles and the correlation between them can help you navigate both good and bad times in the market.

All of these point towards the importance of taking the help of a financial advisor especially if you only reevaluate and readjust your portfolio once a year (or in longer durations). Having someone guide you through these cycles could be very helpful in maintaining your portfolio and also help with your peace of mind during volatile times!

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