£250 a month to save/invest

Ebe_Scrooge

Thanks JimJames. I certainly hope that the guy in charge of my pension fund has the same approach as you !

bowlhead99

You can absolutely guarantee that an average "guy running a pension fund" will not have put all its assets in cash and government bonds and premium bonds. It would be taking pretty much zero investment risk, and thus would expect to receive pretty much zero real terms return; i.e. high inflation risk, high shortfall risk.

Overall it would have next to no chance of making sufficient return for people to put away a small proportion of their lifetime average wage and then draw an income in retirement of a larger portion of their lifetime average wage, increasing with inflation.

It is true that you have to take investment risk to make money in real terms. And certainly, Woolworths, Northern Rock, Bradford & Bingley, Enron, Lehman or Comet investors may have had disappointments. They would have also had many years of very high percentage returns from those investments, and would likely have taken profits out of those investments and invested them elsewhere. Certainly they would deserve everything they got, if they gambled on selecting just a small handful of individual companies and put all their wealth into them and kept it there.

There are 2000 companies listed in the UK, 20,000 listed elsewhere around the world, and more than 2000 ready-made portfolios available in the form of investment funds and investment trusts run by regulated investment managers based in the UK or nearby.By making your own small investment portfolio of a few sensibly-chosen investment funds, each having exposure to 50-1000 individual underlying companies, it is extremely difficult to lose money over a long enough term.

That is because the returns come from the fact that you own a part of real companies and the country's (or better, the world's) GDP growth over time, paying you some of the profits out as annual dividend income and reinvesting the rest in building up the businesses and providing employment to hundreds of millions, increasing the value of what is left.

You mention that investing in government bonds is safe because the government will reliably pay back the face value of the bond. However, what you are missing is that a great many bonds can only be bought for more than their face value. If the yield to maturity of a 10 year bond is 2-3%, and market interest rates rise to 4-5%, nobody will pay you anything close to what you paid for your bonds, to take them off your hands; you can very easily lose money (actual money if you need to cash out early; or just real terms value if you have time on your hands and the relative luxury of being able to hold to maturity)