Don't worry about the world, just save enough for your retirement - Fink

Of all the many problems around the world currently, the one that worries Larry Fink the most is how little we talk about and save for retirement.

Fink, the chairman and CEO of one of the world’s largest asset managers, Black Rock, recently talked to Adrian Gore, CEO of Discovery at a conference hosted by Cogence. Cogence is Discovery’s discretionary fund manager in partnership with Black Rock.

Fink says investors often ask about the election in the United States, the war in Israel and Gaza and Lebanon, the war in Ukraine, the impact of artificial intelligence (AI) and many other macro-economic problems they feel the need to understand today.

But Fink says he is less concerned about these problems as they have been identified and generally humanity finds a way to solve them.

He says governments are hamstrung by debt but he believes strong capital markets like those in the US, digitisation and AI will be utilised to unlock economic growth and tackle problems such as ageing infrastructure, declining developed world populations and the need for decarbonisation. A more hopeful economy will emerge, he says.

Hope in longer lives

Life will also be more hopeful as science develops to extend life – to reduce dementia and other diseases, Fink says.

This in conjunction with information about how to live more healthily will lead to lives less burdened with disease, he says.

But what is worrying is that we're not talking about whether we can afford this extension of our lives – how do we translate this incredible medical blessing into a life blessing?

Fink says more people need to be financially literate about saving and the power of compound interest and investing for growth.

What you do counts the most

Being able to save for an increasingly long retirement means you need to have the right savings behaviour, Kenny Rabson, CEO of Discovery Invest, and Grant Aidoo-Nash, the head of EMEA model portfolio business development at BlackRock, told the Cogence conference.

Aidoo-Nash says investment guru Warren Buffet sums it up by saying when it comes to investing you don’t have to be smarter than the rest – just more disciplined than them.

The discipline that will help you get a good income in retirement includes:

• Starting to save early

Rabson says many people think they can start saving later in life, because they think they will be able to catch up.

But there is a cost to starting late. Typically, you want to save enough to provide an income that replaces 75 percent of the income you were earning before you retire at age 65 - a 75 percent replacement ratio. To achieve this:

• If you start saving at age 20, then you only need to save about 13 percent of your income;
• If you delay your decision to save to age 30, you will need to save 22 percent of your income in your fund.
• If you delay it to age 40, you need to save 38 percent of your income.
• If you delay to age 50, you need to save about 79 percent of your income.

• Save consistently through your working life

Rabson says once you are contributing to your retirement savings, you need to keep it up through the course of your working life.

If you stop adding to your savings at any point, you won’t achieve a good replacement ratio, he says.

For example, if you only contribute for 10 years out of 20 years you have to save until retirement, you will only achieve 64 percent of your savings target.

• Don’t succumb to envy

Aidoo-Nash says to be a disciplined saver you should not allow envy or the fear of missing out (FOMO) to affect your decisions about how to save.

Retirement investors are protected from market volatility by being obliged to invest in diversified portfolios with no more than 75 percent in growth assets, such as equities and listed property.

Aidoo-Nash says he is invested in a diversified portfolio but he often looks with envy at the performance of other asset classes and indices, such as the S&P500 which tracks the performance of the top 500 shares listed in the US.

When the index has rallied and outperformed his investment as it did after the global financial crisis from 2009 to 2019, he feels envious. Aidoo-Nash says his diversified portfolio returned a fantastic 230 percent over this period, but the S&P500’s 350 percent return made him envious.

However, diversification works as over the long-term, the 23 years to the end of 2023, the returns of the S&P500 and the diversified portfolio evened out delivering almost identical total returns, he says.

In addition, the diversified portfolio was shielded from the big lows over the period, losing only 16 percent when the index lost 40% over 2000 -2002 Dotcom crisis years and only 28 percent when the index lost 37 percent in 2008 for example, Aidoo-Nash says.

• Don’t be overconfident

Optimism can also cloud your judgment and lead you to take chances on investments such as cryptocurrencies and the next new hot tech startup, he says.

In the UK nearly £8 billion is spent annually playing the National Lottery, Aidoo-Nash says. The odds of picking the winning six lottery numbers out of 49 numbers is one in 45 million, he says.

This kind of optimism also leads people to invest in individual shares. Over the last five years, there was a 37% chance that any individual share on the US stock exchange would have lost money. Investing in a basket of shares in a US mutual (unit trust) fund or an exchange traded fund, however, had a much lower (0.1%) chance of losing money over the same period, Aidoo-Nash says.

• Beware of the fear of losing

We also have to guard against acting irrationally for fear of losing money – it can cause us to act when we shouldn’t, sit on the sidelines or follow the herd, Aidoo-Nash says.

We have a natural tendency to take action when faced with problems, he says.  

Studies have shown that a football goalkeeper has the greatest chance of stopping a penalty kick by staying in the middle of the goal. Similarly, we have the greatest chance of earning good returns from a well-diversified portfolio rather than trying to time our entry into markets to gain when they are rising and exit when they are falling, Aidoo-Nash says.

It's very easy to lose yourself to your emotions, he says. But taking risk too aggressively or being too conservative can be really harmful. The narrow, disciplined middle ground is best for us to navigate, he says.