New Pension, High Risk or Low Risk ?

Duckstar_2

Hi Everyone,
Here is my situation, any help i would appriciate !!

I am 21, and i have just placed 15k into my pension fund.
I have a finacial advisor who is doing everything for me, but i need to tell her what kind of investment risk i am happy with.
Since i wont be able to touch my pension for 34 years, she said it would be a good idea to put the money into a high risk spread across the world (i.e. 40% Europe, 30% U.S.A and 30% Asia) because the market will grow and increase overall by the time i reach the age to access it . (obviously i can change the risk as i get older to secure a stable fund).
Is this the best solution for my situation and age ?
I spoke to my dad about this, and he said that he would have been better off putting his money in a very low risk investment when he was my age.

Any help would be greatly appriciated !

Thanks,
Tom

bendix

Listen to your financial advisor. You're 21. You have decades to make the markets work for you. I'm sure your financial advisor can provide a chart showing how much £15000 invested in 1975 in her suggested mix of assets has appreciated in the last 34 years, to prove your dad wrong.

Dads are good for advice about women and football - leave the finances to people who know what they are talking about.

dunstonh

It is the requirement of an IFA to ascertain your risk profile. Not for them to put you in what they think is right for you generically. A tied agent may want you to just pick a number but hopefully you are not using a tied agent.

You should have been asked a number of questions that allows the IFA to work out the risk profile for you. You can then agree or disagree with that. Questions like how would you feel if the statement arrived and it was 30% lower than last years value? (variations of that sort of theme as we all have our own questioning styles).

I spoke to my dad about this, and he said that he would have been better off putting his money in a very low risk investment when he was my age.

I very much doubt that is the case. Indeed, we know it isnt.

Duckstar_2

Brilliant, thanks for your advice.
I filled out a questionaire, which has given me the result "53", which puts me in Portfolio 4.

Portfolio 4 High - 30 % Medium - 40 % Low - 30 %

But i think Portfolio 5 would be a better choice

Portfolio 5 High - 50 % Medium - 40 % Low - 10 %

To be honest, this is the first time i have ever done something like this..
But from what i can see, Portfolio 5 would work in the long run for high profit.

Thanks again,
Tom

dunstonh

In that case, if I was the adviser I would state that I felt you were risk 4 but you chose to overule me and felt risk 5 was more appropriate. I would hten give you an indication of the loss potential appropriate to that risk level, document that and set up the portfolio based on the higher risk if you hadnt changed your mind. I would expect that is fairly normal for most IFAs (its mostly common sense after all).

The higher the risk the portfolio, the higher the potential for gain but also the higher potential for loss. Everyone is happy when things go up but how are you going to feel when things go down?

MikeJones_2

Hi Duckstar,

In addition to the previous posts, have you also discussed with your adviser:

(a) under what circumstances you may expect your attitude to investment risk might change (e.g. through redundancy, age) and

(b) what periodic timescale have you laid down to review your attitude to investment risk and

(c) what other types of risk might affect your retirement provision?

Food for thought, if you've not already done so.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

jamesd

Tom, the adviser is correct about risk and you're free to pick a higher level. Just be sure that you understand the implications: in a normal market slump the mainstream UK market will drop around 20% every three to seven years and in more severe ones seen every few of decades it'll drop 40-50%. In extreme cases it may drop 80% or even more. The main UK market would often be called medium or medium-high risk.

An emerging markets fund may drop as much as 50-60% regularly and 80% or more infrequently. Drops of 80% have been seen over the last couple of years. To give you some idea, the Neptune Russia and Greater Russia fund had a unit price of 3.797 on 22 May 2008. On 6 February 2009 the unit price was 1.264, leaving anyone who bough at the higher price and sold at the lower with just 33.2% of the money they started with. On 22 May the price was 2.144, a gain of 70% for those who bought at the low price but still only 56% of the high price.

Risk tolerance is something of a panic meter: it measures how much of a drop you'll take before giving up and selling at the bottom, then missing the recovery that would get you money back.