You’re never too old to think long term

How far ahead should you be looking? Dr Benjamin Holdsworth looks at a prudent investment horizon, whatever your age.

Many investors nearing retirement – or already in it – question taking a ‘long-term’ approach and whether they should still be investing in the stock market. 

When it comes to ‘systematic’ investing – capturing specific market risks in a disciplined and rules-based manner – a further question might also be: ‘Should I still own value and small cap stocks, as their excess returns, relative to the market, can take some time to come through?’

The investing lifecycle

If we step back and think about the life cycle of investing, it starts with the accumulation phase where investors build assets in an investment portfolio, sacrificing today’s consumption for tomorrow’s retirement income. 

Horizons tend to be long, not least because you cannot take assets and income from most pension plans until you are 55. Prior to the pension freedoms, delivered by the former Chancellor George Osborne in 2015, most people were obliged to use their pension pots to buy an annuity. 

This, in effect, meant that an individual in the accumulation phase had to think about managing a shortening horizon as retirement approached – often by moving out of equities and into bonds. Equities are shares in a company whereas bonds are certificates bought from the government or a company that guarantee to pay back the holder with interest. Equities therefore carry greater risk but also offer the opportunity for greater reward.