Pensions & Risk Ratings

L

Leesider32

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Hi all,

I started a new job recently and so I am going with their pension option of 5% from me and 5% from them which is decent enough.

The lady I spoke with said that I should go with the higher risk investment option. Also I contacted the financial advisor for my old pension to see was their a transfer cost, I am going to talk to him about that soon but in an email to me he said I should be going for a high risk investment option as well. Curious as to why they are both saying I should go with the high risk option, is it because the low risk has a high percentage invested in bonds and they are giving a negative return at the moment? Or is there another reason?

Btw I am in my early 40s.

Thanks
 
If you are in your early 40’s then you are looking at a potential c25 year investment time horizon.
Adopting a low risk strategy is likely to deliver a low rate of return. On the other hand, a higher risk strategy (high Equity content) , whilst likely to result in greater volatility of return, is also likely (but not guaranteed ) to deliver higher returns over time. Perhaps as you get closer to retirement you can then begin to reduce the risk profile. But with c25 years to go, you can justify a higher risk strategy for the next 15-20 years.
 
Because equities typically deliver the best returns over time but can be volatile, so people with shorter time horizons need to be cautious with them.
 
First of all, you need to understand investment risk. When it comes to pensions schemes, we're not talking about situations where you get a call and get told it's all gone (although there are plenty of opportunities to lose all your money in the self directed arena). It is usually how much your money can go up and down. Risk and return are related, so the more it make you, the more it can go up and down in the short term.

Think of it like a rollercoaster. The one with all the twists and loops gives you the biggest thrill but it's not for everyone. Some might like an easier ride.

The ESMA ratings 1-7 are misleading, as can the life companies ratings of high, medium and low risk. ESMA is based on volatility over a 3 year period. If markets are calm for those 3 years, a high equity (which is high investment risk) has a lower ESMA rating. That same fund when markets are volatile, gets a higher rating and suddenly an investor is in a higher risk strategy than they intended.

As for lift companies (and adviors) describing investments as high, medium and low risk. Are the establishing what an investors interpretation of what high risk means? I have found that they don't and assume that investors understand investment risk, which in most cases they don't. The fact that they don't ask the questions is negligent.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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