There is a wide range of investment options available throughout the investment world. We hope to answer some of the questions you may have. There is a variety of funds for you to invest in, depending on your lifestyle and retirement goals. These funds invest in a wide range of assets including equities (international or local), bonds (issued by the government), and corporate bonds (bonds issued by companies).
Investing aims to beat the potentially damaging effects of inflation on the value of your savings by investing in growth assets, such as equities during the early years. This is called the accumulation phase. As you approach your target retirement age, it will be prudent to switch funds with the aim of protecting your account. This is to protect you from unexpected falls in fund prices near retirement. However, it means you may lose out on future investment growth, meaning you do not maximize the investment growth potential of your fund near retirement.
Risk vs Reward
Investment involves risk and what actually is the risk? They think of risk in terms of danger and potential loss. Taking a risk can be dangerous but it can be rewarding. Risk means uncertainty. We are not able to predict what may happen in the future is a risk itself. Nobody knows.
All these concepts of risk are applied to investment as well. It is difficult to predict what will happen over time, share prices fluctuate daily, interest rates rise as we are writing this and investments are more rewarding than others. Understanding these types of investment risks is important if you want to decide what sort of investment is right for you.
What does risk mean when you are saving for retirement?
Investment risk – Risk of your savings falling in value
Inflation risk – Risk that your investments grow at a rate less than the rate of increase in the cost of living (inflation). For example, if inflation is 4% over time and your investments are only growing 2%, rising prices erode the value of your savings.
Currency risk – exchange-rate risk arises from the change in the price of one currency in relation to another. This risk arises if you invest in another currency (for example USD) rather than the currency in which you wish to receive your balance at your retirement age (for example SGD).
Annuity risk – you may decide to use built-up savings to buy an annuity, which will provide you with an income in retirement. The amount you will get depends on a number of factors which include interest rates, the level of inflation when you retire, and your anticipated life expectancy. This risk will not protect you against the cost of buying an income in retirement.
What kind of investor are you?
After identifying the main risks, the next stage is to determine your attitude towards risks. Are you prepared to live with some degree of investment risk if it means a better chance of achieving higher returns, typically over a longer period of time? Are you very risk averse and don’t want to risk your capital under any circumstances? Or are you somewhere in between in terms of risk?
How close you are to retirement should be an important factor in decision-making. The longer you have until retirement, the higher the risk you may be prepared to take in return for the potential of greater rewards as you have time to ride through the ups and downs from riskier investments.
Question 1 What best describes your outlook?
A: I am aiming the live the “high life” when I retire and I am willing to take a higher level of investment risk to get this.
B: I want my retirement days to be enjoyable but I will settle for a little less to spend if that means less investment risk
C: I want to keep my investment risks as low as possible, even if that means a smaller saving balance
Question 2 How long will it be before you retire?
A: More than 10 years
B: 5 to 10 years
C: Less than 5 years
Question 3 What do you expect to happen to your pay/Salary?
A: My salary should increase substantially over the years
B: My salary should increase in line with price rises but I am not expecting it to get much higher
C: I don’t think my salary will increase. In fact, it may even decrease
Question 4 If you wanted to increase your chances of improving the size of your savings, would you…?
A: Take a big risk with a small amount of money
B: Take a small risk with a bigger amount of money
C: I wouldn’t be happy taking any risk
Question 5 Investing in company shares is generally acknowledged as the best way of providing growth that beats the effects of inflation over the long term. Are you happy to put your money in funds that invest in company shares?
A: Yes, for me the risks are worth it
B: Yes, but I want some less risky investments
C: No, the risk makes me nervous
Question 6 Just two months after you put money into a long-term investment or start an income drawdown account, it falls in value by 10%. You still think it’s a good investment. What do you do?
A: Switch more of your account into equities. It was always a good investment and now it’s cheaper!
B: Hold tight and wait for it to bounce back.
C: No, the risk makes me nervous
Question 7 Which would you choose?
A: 20% chance of winning $50,000
B: 50% chance of winning $15,000
C: $2,000 guaranteed cash
If you answered mostly A
You are an Adventurous Investor. You want your capital to grow as much as possible and seem to be prepared to take risks in ortoeve your financial goals, to ride out the ups and downs of the market over the long term. The fund range available to you is risk from very low risk to very high risk in terms of capital risk, so you may wish to avoid funds that are rated very low risk.
If you answered mostly B
You appear to be a Balanced Investor. You are comfortable taking some risks to help your capital grow but you don’t want to see your investments going up and down like a rollercoaster. This suggests that you may prefer investment options that don’t rise and fall too sharply. The fund range can range from very low risk to very high risk in terms of capital risk, you can avoid funds that are rated very low risk and those medium-high risk.
If you answered mostly C
You appear to be a Cautious Investor. You want your investments to grow but you do not want to take many risks to make this happen. Protecting the value of your investments seems to be more important to you than trying to grow them in the long term. The fund range available to you is risk-rated from very low risk to very high risk, in terms of capital risk, you may wish to avoid funds that are medium risk and above.
What does this mean for you and your saving scheme? The range of investment options caters to different attitudes to risk and requirements to balance risk with reward according to an individual’s needs and goals. The funds invest in a wide range of asset classes that carry different levels of risk, including cash, bonds, and equities.
Dealing with the main asset sectors in order of risk
Cash is deemed the safest asset but it is likely to generate comparatively lower investment returns over the long term. Historically cash savings struggle to beat inflation. Depending upon interest rates at the time, it may be possible that a cash fund generates an overall negative return due to interest rates or annual management fees.
Fixed income funds invest in a spread of fixed interest investments that pay a fixed level of income each year during their lifetime. They include government bonds and corporate bonds and are suitable for lower-risk investors, particularly where individuals may be looking to buy an annuity. However, it should be noted that there can be times when fixed income funds can be volatile and you should take advice on taking exposure to any asset class.
Property funds invest in a range of commercial property assets such as offices, shopping centers, retail warehouse parks, and industrial estates. These funds are often used as a diversifier and are seen as an alternative investment for long-term growth.
Multi-asset funds invest in a mix of ‘conventional’ investments, such as cash, fixed interest, and equity funds, and ‘alternative’ investments, which may include commercial property or commodities, for example. Given its diversity of assets, a multi-asset fund may offer less volatility than an equity fund but, as a result, the potential for higher returns may be reduced.
Equity funds can invest in a mix of local and global equities. They can be ‘actively’ managed with an aim to beat index returns or they can be ‘passively’ managed (for less cost) to track the index. There will be greater volatility and risk than cash or fixed interest funds, but improved long-term growth prospects.
Active versus Passive Fund Management
What are passive funds?
A passive fund will look to mirror the index in which it invests. For example, a passive UK equity fund will mirror the FTSE All Share Index. If one company’s shares make up 4% of the index by market valuation, this fund would hold 4% of its assets in this company’s shares. This is repeated for every company quoted in the Index until the fund mirrors the make-up of the FTSE All Share Index. Fund returns should broadly be in line with Index returns (before fees).
What are active funds?
By contrast, an actively managed fund will pick out stocks within the index that the fund managers believe represent good value for your money. So the difference here is that an actively run UK equity fund could outperform or underperform an equivalent passively run UK equity fund and the Index return. Because of the additional analysis and expertise required to run an active fund, the Annual Management Charges (cost of the fund) are typically higher than a passive fund.