How Not To Retire Disappointed

Are you taking enough risk?

When it comes to investing we really all want the same thing… No risk and plenty of return!  Unfortunately, life doesn’t work that way. And investing too conservatively can be as dangerous to your financial well-being as a too-risky investment.  Investment success is all about getting the balance right.  

Why is it that so many people struggle to retire financially free?  There are all the usual reasons – not saving enough; not preserving your funds when resigning from jobs. But another big contributing factor is our desire not to take any risk with our investment.

“I just don’t want to lose my money,” clients often tell us.

The problem is that “not losing money” usually means putting it in conservative investments that invest mostly in cash or bonds. These funds tend not to deliver any nasty surprises, like the sharp drops we so often see in equity funds. The problem is they also seldom reward investors handsomely for sticking it out in the markets over time.

And while you might sleep easy in the knowledge that you are not ”losing money”, your investment is also taking it easy and not working nearly hard enough at earning you a good return.

In the short run, this may not be that noticeable, but in the long run a few percentage points of return a year really adds up and makes a huge difference to your investment outcome.  For example, assuming inflation at 5%, if you  invested R100 000 at 9% a year over 30 years, your investment would be worth R1.33m. Invest that R100 000 at a 10% a year return, and your investment would come to R1.75m. That 1% a year additional return added up to a welcome R400 000 over time!

So what do we mean when we tell people to take more risk with their investments?  Quite simply, we mean that to get a higher long term return, you need to include some shares (equities) in your portfolio – and the graph below clearly shows you why. Over the long term, equities have outperformed cash and bonds by a long shot, and there is no reason to believe this won’t be the case in future.

Source: Inet.

So keep in mind that you need to take some risk to make sure your money grows enough. The longer you are investing for, the more likely you are to be disappointed by investing in a cash-type fund. Make sure you take enough risk to achieve your goals.

Remember retirement is a long term game – and with time on your side, not investing in equities could be the bigger risk.