Low Risk Pension

fred246

My sister employs an IFA to manage her pension. If you ever mention IFA or pension she repeats the words "low risk" about 20 times. Everything has to be "low risk". Will this sort of behaviour seriously damage your wealth?

MK62

Impossible to say.......it might, but if the next big crash is just round the corner.....

People have different attitudes to risk, and each may change that attitude through their lives, depending on circumstances.
People also tend to have different perceptions on risk......"low risk" to one person might not mean quite the same to another......

cfw1994

I would broadly say “yes”.
Unless you are investing over a short (sub 10-year) timeframe, saying low risk means missing out on long-term growth.

But really one would need to know more about where the IFA has suggested she invest into as a result of that perspective.

ETA: & I also just recalled you have a personal long-time loathing of IFAs....so I’m guessing you are wanting to suggest she is being misled. Ultimately it is her money. If you think you can add some value to her, go ahead: feel free to enlighten us as to your advice!

barnstar2077

Unless your sister is completely clueless (I don't mean that as an insult, I am clueless about the electrics for instance but know enough to get an expert in when I need to) then it seems like a waste of money to employ an IFA if all she wants is low risk. Low risk, low reward, but a much more predictable outcome. Whether what she is doing is right for her on the other hand really depends on her attitude to risk, and how much time she has to go before she needs the money,

OldMusicGuy

fred246 wrote: »

My sister employs an IFA to manage her pension. If you ever mention IFA or pension she repeats the words "low risk" about 20 times. Everything has to be "low risk". Will this sort of behaviour seriously damage your wealth?

It seriously damaged mine. Like many people who do not understand investing, that was my default position for many years. So as I moved jobs and acquired various DC pots, when offered an investment choice I always took the lowest risk possible. In some cases this meant me having DC pots invested in money market funds earning net less than 1%!

This meant than for the last 20 years, and through a great bull run, several of my pension funds were invested at far too low a risk level. If I had put them all in something like an 80% equity fund I would be a lot wealthier than I am now. I could have retired earlier as well.

I needed to understand that even though I had a risk averse attitude that if I left money invested for the long term, I could weather the short term drops. I know that now.

I had various IFA and FA advice over that period. The problem was that I was so strongly risk-averse, I always told them to invest in low risk funds. They did what I asked. It was my fault, not theirs. It was only when I read all the books that I recommend on here to people that I really understood the principles behind investing.

So while I don't blame the advisers I have used, I certainly don't see the need for them any more.

beamyup

OldMusicGuy wrote: »

So while I don't blame the advisers I have used, I certainly don't see the need for them any more.

Did the advisers explain this to you?

Did you ever dare to calculate how much in fees & charges you paid over that period to advisers? If so was that also significant compared to your meagre low risk returns?

AnotherJoe

Indeed with really low risk, the advisers fees take even more of chunk out of any growth than a high risk would.
It is of course relative, we had free pension appraisals at work, I had other pensions and so my work pension was invested in one particular fund. I told the adviser my choice of this fund was as my low risk fund balancing out my higher risk choices in the personal pensions. He said "actually that fund is the one we recommend for the high risk component of a portfolio"

But yes, chances are the OPs sister is damaging her long term future because "low risk" for say 30 years is actually a highly risk approach. However the adviser is on a hiding to nothing because if they recommended a higher risk fund and it declined even slightly then sister will cry foul panic and sell up and sack adviser.

I wonder if IFAs here would comment, do they always end up advising something lower risk than is objectively warranted ?

OldMusicGuy

beamyup wrote: »

Did the advisers explain this to you?

Did you ever dare to calculate how much in fees & charges you paid over that period to advisers? If so was that also significant compared to your meagre low risk returns?

None of the advisers explained about investing over the long term and tried to get me to change my risk attitude. But the reality was I would not have listened. You can only change that yourself, and you have to do that by thinking about it.

The worst investment decision I made was one I made myself. I worked in the US for a couple of years in the 90s and built up a 401K. I left the US in 99 and left this fund invested in money market funds from 1999 up to about 5 years ago. How stupid was that?

The cost of the advice was not a factor in my poor returns because most of it was paid for on a transactional basis or was given as part of the setting up of the pensions. The poor performance is wholly down to my bad choices because I did not understand investing. Fortunately I was able to bulk up my DC pot through aggressive saving in my final years at work.

Linton

To someone inexperienced in investing, "low risk" seems to mean that they dont want to lose all their money. They then see a 10% drop in valuation as merely the first step in an inevitable decline and it frightens them.


And yes, this sort of behaviour will probably damage your long term wealth. However it may make you happier, so its a balance.


The answer I think is for the IFA or perhaps their brother to explore their risk aversion to the next level of detail, with what-if scenarios. Do they want their statements to always show a gain or would they accept the occasional fall? Tie this in with possible returns, especially after inflation. This would show that "safe" investments such as cash are in real long term wealth terms not safe at all. Explain how funds invest in hundrreds of individual companies and that the chance of losing everything is virtually zero but some volatility is almost certain.

[Deleted User]

t seriously damaged mine. Like many people who do not understand investing, that was my default position for many years. So as I moved jobs and acquired various DC pots, when offered an investment choice I always took the lowest risk possible. In some cases this meant me having DC pots invested in money market funds earning net less than 1%!

This meant than for the last 20 years, and through a great bull run, several of my pension funds were invested at far too low a risk level. If I had put them all in something like an 80% equity fund I would be a lot wealthier than I am now. I could have retired earlier as well.

A VERY good point. This stems from the following misconceptions, which are quite popular in the industry:

1. Risk = volatility/standard deviations/etc Really isn’t. The main risk for an investor trying to build up a pension is that he/she won’t have enough in the pension pot.

2. Peoples’ risk attitude is constant and portfolios should be based on answers to a few questions. That’s BS. Most bullish people feel scared and risk averse during a real bear. Read 1930s or 1970s memoirs to get a bit more appreciation. By the same token, others feel a lot more “brave” on certain days.

3. Bonds are safer than stocks. “Risk averse” people should get lots of bonds. Again, completely wrong. For example, Bonds can be absolutely gutted by unexpected inflation. Shares handle inflation amazingly well. Corporate bonds can suffer badly in a major default event - exactly the type of event when we need safety. Crucially, bonds are riskier than shares over the long term (see bullet 1). The equation changes for investors with short term outlook because bonds are less volatile.

Linton

Deleted_User wrote: »

A VERY good point. This stems from the following misconceptions, which are quite popular in the industry:

1. Risk = volatility/standard deviations/etc Really isn’t. The main risk for an investor trying to build up a pension is that he/she won’t have enough in the pension pot.

Agree that Risk is different to Volatility. The fault I think lies with academics who can do intreresting maths with volatility. This leads to nonsense such as the 2008/2009 crash was a 1 in 1000 year event or whatever. Mandelbrot pointed this out many years ago and the error was nicely shown by the collapse of LTCM run by Nobel prize academics in the 1990s.



Volatility is a separate issue but is important for inexperienced investors who see a minor crash as merely the start of a larger one.



Disagree the risk being that the investor wont have enough in the pot. That leads to the "solution" that striving to get more in the pot is always better. A better description is that extpectations dont match reality. Unless that is fixed ones pension pot will never be enough.

2. Peoples’ risk attitude is constant and portfolios should be based on answers to a few questions. That’s BS. Most bullish people feel scared and risk averse during a real bear. Read 1930s or 1970s memoirs to get a bit more appreciation. By the same token, others feel a lot more “brave” on certain days.

Agree. Also it can vary within one's investments. I am extremely cautious about those investments that provide my basic living needs but pretty adventurous about any wealth I have beyond that.

3. Bonds are safer than stocks. “Risk averse” people should get lots of bonds. Again, completely wrong. For example, Bonds can be absolutely gutted by unexpected inflation. Shares handle inflation amazingly well. Corporate bonds can suffer badly in a major default event - exactly the type of event when we need safety. Crucially, bonds are riskier than shares over the long term (see bullet 1). The equation changes for investors with short term outlook because bonds are less volatile.

Agree that one shouldnt simply see some classes of investment as safe and others as not safe. Better to think in terms of diversification. This is where corporate bonds may play some part - their income is much more stable than from equities and provided the company doesnt go bust, their value at maturity is guaranteed. Also appropriateness comes into the question - someone in their 90's would be better off investing in gilts rather than 100% equity. Real growth is often not the primary requirement.