Vinod Bajaj, author of the book “Pension Without Tension” briefly explains pension investment options. His book is priced at €9.99 and will be released in late October 2021. www.pensionwithouttension.com will be launched shortly for online orders.
Congratulations! you have decided to join a pension scheme. It is common knowledge that retirement benefits in the form of a pension are generally paid to you from investment returns and not from your contributions.
Hence it is important for you to first understand two main asset classes for investment.
Mainstream assets include bonds, equity or shares, property and cash
Alternative assets include commodities, private equity, infrastructure, currency and hedge funds
Investing in a pension scheme is for the long term. The choice of investment will depend upon your tolerance for the level of risk, return expectation and investment time frame. It is common knowledge that the higher returns usually carry higher levels of risk.
But having a longer time horizon for your investments can mitigate risk to a reasonable level.
If you are young and at an early stage of your life, you can take a somewhat higher investment risk. As you move closer to retirement, you can gradually reduce the level of risk. This is often called a “lifestyle investment option”. You should not worry about short term market instability or volatility as generally it will smooth out over a medium period (3-5 years) and you can see the growth. History has shown that pension funds have typically grown at an average of 7% per annum over ten years.
There are multiple investment funds available with a clear risk rating that defines the level of risk associated with each fund. Each fund has a mix of assets, and the allocations of various assets usually help decide the overall risk rating. Investment funds give you quick access to several asset classes and help build your bespoke investment portfolio. For example, you do not need to buy a property but can enjoy property investment returns by investing in a property fund.
Fund options might include:
- A fund with a high allocation of bonds and cash will have a low-risk rating
- A fund with a high allocation of equity/shares will have a high-risk rating
- Some specialised funds will have only one asset class, such as a property fund, and can have a medium-risk rating
- There are funds that combine various funds to deliver a balanced risk rating
- There are multi-asset funds that invest in a range of assets, countries, and market sectors as part of a diversification strategy. If one asset class performs poorly, other assets may pick up the shortfall and still deliver the desired investment returns
A balanced risk/return strategy may be a good approach. Finally, don’t make common pension investment mistakes such as too conservative, lack of diversification, overreaction to market volatility and investing in risky assets near retirement.
My book “Pension Without Tension” (152 pages) covers the topic of investments at greater length.
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