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The conventional advice to retirees is that they should
invest in low-risk financial instruments during retirement.
Alternatively, the advice of some advisors is that "safe"
investments would simply expose your retirement fund to other
risks. There is merit in both positions, which is why portfolio
diversification can be a great strategy at any life stage.
Ultimately, retirees must invest so that they can sleep well
at night and protect the real value of their investment. Retirees
should base their investment decisions on the following:
1) Risk tolerance- Some people are gamblers, while others
are ultra-conservative. Your risk tolerance is primarily influenced
by your personality. The main point about investing and risk
is that you should be comfortable with the level of risk that
you're taking. No one else can tell you what your comfort-level
is. You certainly do not want to invest exclusively in growth
options that leave you perpetually worried.
2) Depth of reserves- The level of risk that you can withstand
would be dependent on the depth of your reserves as well.
Someone who invests 40% of his retirement fund in growth options
would find that the nominal amount exposed to loss would be
significant. 40% of a $200,000 retirement fund is a significantly
higher risk than the same percentage of a $2,000,000.00 retirement
fund in terms of the actual dollar value..
3) Inflation risk- Although you're seeking to provide security
for your money, you may inadvertently cause a real loss or
substantially lower real returns in the long-run. The good
news is that you do not have to put your retirement fund at
risk to beat inflation. Use the Consumer Price Index as a
guide and seek high-yield CDs or bonds that provide rates
of return that outstrip the inflation rate.
4) Understand the risk-return trade-off- The higher the risk
associated with a financial instrument, the greater the potential
return is. This trade-off is a primary reason that diversification
should take place. This is because neither situation is optimal
for the retiree. Low risk-low return increases inflation risk
while high risk-high return increases the risk of loss. Conservative
investing does not necessarily imply investing exclusively
in low-risk funds. It suggests that the majority of your investment
should be split between cash and income options and a relatively
lower percentage assigned to growth instruments.
5) Understand averages- In choosing mutual funds;
beware of making selections based on averages alone. Apart
from investment fees and charges being a significant aspect
of most mutual funds, averages can be misleading. One portfolio
may have a better average than another. However if the higher-average
fund is volatile, reaching extreme highs and lows, this could
be riskier than if you have a moderate-return fund that does
not tend to either extremities.
Some retirees leave the bulk of their retirement funds in
savings accounts, while their higher-order investments are
money-market funds. In economies where the inflation rate
is medium to high, this is likely to do nothing for the preservation
of your savings. This would mean that your fund would dwindle
faster, especially if you didn't optimise your choice. Even
if you are making a low-risk investment, it is incumbent on
you to choose the best-performing fixed deposit or money-market
fund.
The argument that high-risk growth options are not for retirees
is a half-truth. The real truth is that the non-working retiree
should not invest a significant portion of his savings aggressively.
Given that retirees are living longer, they are more exposed
to the risk of outliving their savings and inflation risk.
Once portfolios are diversified according to risk tolerance,
financial reserves and needs, then the retiree would be in
a better position.
Darrell Victor is a financial services sales professional
who specialises in retirement planning and insurance advice.
To read his latest articles visit http://www.helium.com/user/show_articles/338815
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