the idea that investors should migrate away from equities and buy bonds before they hit the final stretch leading up to their retirement party is bogus, claim David Blake and Douglas Wright in Optimal Funding and Investment Strategies in Defined Contribution Pension Plans . Such an approach – which is the blueprint for the creation of target date funds in the US and lifestyle default funds in Europe’s defined contribution schemes – fails to factor in the investment performance of people’s pension pots, their feelings about risk-taking, or any projected increase to salaries. “You can’t just use a specific age . . . as a mechanical trigger to determine when to shift out of pension assets into an annuity,” says Prof Blake.
Wipe out - both financially and emotionally. 15% sudden loss - emotionally.When you say handle do you mean emotionally or financially?
I think there is genuine risk reduction in a structured product. The providers of this "risk" use delta hedging techniques which would be way beyond the capacity of a retail investor. Of course the charges may be too high on some versions but the proposition itself is totally valid.It seems that you are correct that investors emotions and not the markets per se really can be their own worst enemy.
It would seem the answer to this question is investors understanding their own emotional responses and Maintaining a long term perspective rather than paying others to bear risk for them in the form of a structured product.
Okay, by DIY you mean buy an Option and a Deposit separately. The real action is in the Option which involves the investment bank maintaining dynamic Black Scholes portfolios, you are not suggesting that retail investors or their advisors would actually get involved in this activity. The CPC shows overall margins in the range 4% to 8% for a typical 6 year product. No doubt an advisor with the right access to the OTC options market could compete with this. There are other aspects of the packaged product though, such as tax, which would make a DIY approach problematic.Duke,
To be clear I'm not suggesting that all retail investors literally DIY their own products, but rather that this is something that could be replicated where it is appropriate by a compentent adviser without all the costs associated with a packaged product.