The Risk Of Not Taking Enough Risk

In the October 2009 edition of the Coronation Fund Managers publication, Corospondent, Louis Stassen, a founder member and former CIO of Coronation, believes that many investors saving for retirement or already drawing an income from their accumulated capital base may be too conservatively positioned. He believes it essential that investors hold an adequate level of growth assets in their portfolio to ensure a decent chance of beating inflation.

Coronation believes that the biggest risk faced by an investor is failure to provide for a comfortable standard of living into retirement, however long that may be. This is often overlooked by investors who seek the 'security' of a product with low volatility and low risk.

A guaranteed investment, while providing the security of a return, could result in the risk of providing a below inflation return. This, once again, emphasises the need for investors to always consult with a financial planning professional for investment assistance and advice to ensure that investments are properly aligned according to time horizons.

The rule of 72 [72 ÷ inflation rate] is used as a guideline to determine how long it will take for the purchasing power of money to halve at a given inflation rate.

For example, let's assume inflation averages 8% over the next 10 years. 72 divided by 8 gives you the figure of 9. This means that on average, every 9 years the purchasing power of your money will halve in value. Conversely, if you purchase a car today for R300 000 you will pay R600 000 for the same car in 9 years time. The same goes for the cost of education, food and other goods.

Another factor is that people are living longer and this means that there is a greater burden on one's retirement savings. According to Stassen, most people often start to reduce their exposure to growth assets far too early. As they reach retirement age [60 years] they automatically take on a more conservative outlook by reducing exposure to growth assets [primarily equity] and up weighting lower expected return assets [for example government bonds]. While this might be appropriate for some, it is in all likelihood inappropriate for most.

Silke Financial Services has the skill and expertise to guide you in determining how your retirement capital fits into your overall balance sheet and in determining the right investment strategy for you.

Acknowledgement to 'Conversations with Coronation' [Article by Louis Stassen - The Risk of not Talking enough Risk]

The content of this communiqué is for information purposes only and does not constitute advice in terms of the Financial Advisory & Intermediary Services Act (FAIS). Any opinions expressed are of a general nature only and are not intended for a particular person. Whilst every care is taken to compile the information, no liability can be accepted for any errors, omissions or reliance on the information contained herein.