Want to retire in 5 years? Here’s how to invest for it, according to the pros

Published Sun, Oct 15 20238:12 PM EDT

Amala Balakrishner @in/amala-balakrishner @_amalabk

Saving for retirement is no mean feat, especially at a time of high inflation and amid fears of a potential recession. Unlike a regular savings plan, a retirement fund needs to "provide an ongoing source of income, act as a hedge against inflation and provide a degree of capital preservation," says Tom Stevenson, investment director for personal investing at Fidelity International. So, what are the best investment strategies if you are looking to retire in around five years' time? Here's what the pros suggest. Inflation-resistant assets Those wanting to retire in the near-ish future need to balance their income and capital-preservation needs with maintaining the real, inflation-adjusted value of their investments. This calls for a much higher exposure to riskier assets like stocks, says Stevenson. Others, like Thomas Poullaouec from asset management firm T. Rowe Price, believe that the ongoing high inflationary environment calls for an overweight position in inflation-sensitive assets such as gold and commodities. These assets should act as a hedge against the risk of a potential upward inflection in inflation levels, he said. Meanwhile, cash is often considered a way to mitigate inflation levels and is viewed more positively for "harvesting a decent return," according to Laith Khalaf, head of investment analysis at AJ Bell. Aside from offering liquidity, cash also provides "dry powder" when markets fall and a " decent level of income ," especially now when interest rates are high, Poullaouec and Fidelity's Stevenson noted. Stock/bond/cash split When deciding how to plan assets across stocks, bonds and cash, the pros say an appropriate balance between short-term stability and long-term growth potential is key. Fidelity's Stevenson reckons that the traditional investment portfolio of 60% bonds and 40% shares five years out from retirement feels "too conservative." "It restricts the ability to keep pace with inflation during a hopefully long retirement," he explained. Stevenson's recommendation is to consider including small allocations to gold, property and infrastructure at around 5% for each asset class. Meanwhile, Judith Ward, a vice president at T. Rowe Price, recommends an age-based approach to planning asset allocation for retirement. "The longer your time horizon, the more of your portfolio you should hold in stocks," she said, adding that including bonds closer to retirement can help dampen short-term market fluctuations while providing opportunities for growth. For someone in their 50s looking to retire soon, Ward suggests allocating 65%-85% of their assets to stocks and the remaining 15%-35% in bonds. Meanwhile, a person in their 60s should consider having 45%-65% of their assets in stocks, 30%-50% in bonds and around 10% in cash, she added. Bullish on Japan, tech plays Within each asset allocation, the importance of diversification should not be overlooked, according to the pros. For stocks, Ward suggests an allocation of: 60% U.S. large-caps; 25% developed international small-caps; and 5% emerging markets. Within bonds, she suggests: 45% U.S. investment grade bonds; 10%-30% U.S. Treasuries; 10% non-traditional bonds; 10% international bonds; 0%-10% in high yield; and 0%-10% emerging markets. On a country-by-country basis, the ongoing volatility makes it harder to predict what makes a good play. Poullaouec is overweight on Japanese stocks thanks to the country's favorable policy settings, competitive fundamentals and structural governance reforms. Fidelity's Stevenson agrees. "Japan looks to offer the best combination of earnings growth, cheap valuations and policy support. The US is relatively expensive. " He is also favorable on China, Europe and the U.K., which he calls "value markets." When it comes to sectors, Stevenson is overweight on growth stocks — particularly those in the technology sector — as they continue to outperform and offer defensiveness in a slowing economy. 'Bonds look more interesting' For Stevenson, however, bonds "look more interesting than equities right now." "Investors can secure a decent yield and look forward to some capital growth too as rates start to ease back, albeit probably more slowly than we thought even a short while ago," he said. Poullaouec adds that holding onto bonds helps to preserve the purchasing power of those nearing retirement. He considers global high-yield bonds attractive as credit fundamentals and higher yields remain supportive, while default rates are rising from historically low levels.