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