Understanding the risk reward trade off

Generally, most pension providers will now provide access to a range of funds that are graded on a risk scale 1 to 7 (where 1 is the lowest risk and 7 is the highest risk).

Everyones attitude to risk is different.

However, it is really important to understand what the longer term impact between choosing a lower risk fund versus higher risk investment fund could have on the longer term growth expectations for your investment/pension fund.

an example, higher risk versus lower risk and ….. the power of compounding!

Person A – growth rate 6% per annum would expect to yield a fund in excess of EUR 1M versus Person B, whose growth rate is much lower would have a fund around EUR 482,176 at age 60. Assuming they started at the same time.

impact of stockmarkets and investor behaviour

Stock market falls can be unnerving. With events like the current one dominating headlines, it’s important to remember that stock markets have been tested in the past and ups and downs are a normal feature of healthy markets.

Increasing fear surrounding the current event has significantly impacted markets worldwide with concerns about its damaging effect on the global economy. As a result, many people’s investments have fallen in value.

what is the longer term impact if I cease payments into my pension plan after 10 years

Person A continues to fund their pension investment for the entire term, then expected fund size at age 65 would be approximately EUR 1,120,782 versus Person B, who ceases investments on their 40th birth day, would expect a reduced fund value of around EUR 432,579 at age 65 (all other things being equal).

how long is the volatility expected to last?

This will likely continue to impact markets over the coming months. I expect until a vaccine, anti viral or the potency of the virus reduces.

However, major events causing markets to fall, particularly in the short term, is something we’ve seen before. History has shown us that markets recover from these substantial falls.

When it comes to investing, over the long term (usually more than ten years) markets have risen in value. Historically, investors who’ve held onto their investments during periods of market ups and downs (often referred to as volatility) are likely to have seen their value increase.

Remember your long term goals

It’s a normal reaction to panic when you see the value of your investments fall. But keeping your emotions in check is important.

You may be wondering, why not get out while things are bad and just get back in when they’re better?

- Trying to time the markets is extremely hard. Even investment professionals struggle to do this.

- Investors who give way to panic and sell during periods of market stress often feel the pain of loss twice. First, when they lock in their losses by panic selling, and secondly when they miss out on the eventual recovery.

- If you’re a long term investor, you’ll need to get back into the market eventually and the best time for either move isn’t at all clear. Recoveries aren’t marked by an “all clear” sign.

Focus on what you can control – remain invested and continue to invest (if you can)!

While you can’t control how markets perform, you can control where you’re invested. Periods of volatility are a valuable reminder of the importance of diversification, i.e. spreading your money across different types of investments and geographical locations.

Diversifying across different investments and countries can help reduce the amount of risk you take and potentially receive more consistent returns, with fewer ups and downs.

Making the right decision

Any significant event, wherever it happens in the world, can affect financial markets.

We are here to help you make a better decision.

If you have a financial planning or product question please contact us. Know more. 091 44 11 88 or office@nelsonlife.ie

This article was written by Rory Nelson, founder of Nelson Life. Rory is celebrating 20 years in financial planning this year. Professional qualifications include; UCD Specialist Diploma in Wealth Management, Pension Trustee Practitioner PTP, UCD Professional Certificate in Stockbroking,UCD Professional Certificate in Asset Management (SIA),  QFA FLIA, Pensions Diploma, Mortgage Advice Diploma, CFP module – Tax & Estate Planning and has a degree in BA Accounting & Finance. He has regularly participated in national financial press.

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