Defined Benefit and high risk avc

If you were lucky enough to be on a defined benefit pension scheme, although it is not forecast to be particularly big, would having that risk free cushion encourage you to invest your avc in high risk funds, at least until the last decade?

I was suprised when I started looking that index tracking funds are rated 6 and considered high anyway. So you could put all your money in an S&P 500 or Msci index before reducing risk at a later stage. I believe Buffet is leaving his kids inheritance in S&P trackers for example.

Henry Ford III

Doesn't sound unreasonable. Have a proper risk/reward assessment done though.

dennyk

Unless you're getting close to retirement age, your defined contribution pension should be mostly invested in "high-risk" equity funds anyway. Any fund that consists of all equities, including index funds, will usually be classified as higher risk because they tend to be very volatile (like equities themselves), but if you're a decade or more away from retiring and actually drawing down on your pension, volatility isn't really a big deal. Your funds might take a big drop from time to time, but they'll also make big gains, and over the long term (i.e. many years) they will most likely gain significantly more than they lose (unless the economy itself collapses, of course, but at that point everyone will be in deep trouble anyway). If you put all your pension funds in "low-risk" investments for 10+ years, the returns over the long term are going to be abysmal and you will miss out on a significant amount of long-term growth.

You should talk to an independent fee-based financial adviser (i.e. not the guy at your bank with some fancy "Wealth Manager" title who's really just a salesperson working for commission or trying to fill a quota and is only going to be trying to sell you the bank's most expensive investment funds) for advice relevant to your current situation and your own risk tolerance before making any investment decisions, if you don't feel comfortable with your own knowledge on the subject (or even if you do!).

Jim2007

https://boards.ie/discussion/comment/117640195#Comment_117640195

The OP asked about a defined benefit pension, so the first paragraph does not apply. And all equity funds are not defined as high risk. In fact portfolios with more than a single digit in property would be classified as high risk and that assumes the property risk is diversified! So with Irish investors holding a single property as their main asset they remain very exposed, as we say in the last recession. In fact any investment in equities would represent a reduction in financial risk.

Jim2007

https://boards.ie/discussion/2058199706/defined-benefit-and-high-risk-avc

As I believe I pointed out else where to you:

• The S&P 500 is not a high risk index. It consists mainly of blue chip companies and is most used as the benchmark to measure the performance of other funds.
• What Buffet does or does not do is not relevant, you are not party to his tax and inheritance planning and can’t know his reasoning. Although from his writing and comments I can’t ever recall him making this suggestion as apparently he does not intend to leave them very much. Sounds like someone’s sales pitch.

You have a choice, plan your retirement or take a flyer at it and hope it works out. My recommendation would be to sit down with a financial planner and evaluate your situation and come up with a savings and investment plan for your retirement.

The bottom line is that you should never take on more financial risk than is necessary, especially when it comes to pensions because the decisions cannot be easily reversed.

dennyk

https://boards.ie/discussion/comment/117640274#Comment_117640274

The OP mentioned they had a defined benefit pension as a "risk-free cushion" (though I wouldn't necessarily describe such a pension as entirely "risk-free", as there's always the risk of wind-up or insolvency that might leave you with a lot less than you'd planned for in the end) and asked about investing their defined contribution AVCs in higher-risk funds.

And yes, there are higher risk investments than equities, but if you look at the risk rating of funds specifically, funds which are 100% equities are always going to be at the higher end of the scale.

Looking at your PPR simply as an investment product is also not really correct. Your PPR also provides a significant amount of utility value to you as a place to live for the duration of your residence there. Some folks might even live in their current home for the rest of their life, thus never realising any gain (or loss) on its sale. Also, if you do sell a PPR, it's most likely going to be to purchase another PPR at the same time (e.g. relocating, upsizing when starting a family, downsizing after the children have moved out, etc.), so you're buying as well as selling in the same overall market conditions. It's not really comparable to owning shares of an REIT or similar, as the latter doesn't generally provide a roof over your head in addition to being a financial investment product.

The J Stands for Jay

I am a member of a DB scheme, and I have invested my AVC in the highest risk rated funds available. They said, I don't believe theyre particularly risky. Vanguard world equity and a European smaller cap fund. I suspect the vangaurd fund has been given a higher rating to make the more expensive active global equity fund look more attractive.

athlone573

What are these "risk ratings" of which you speak? Are they standardised across the industry?

dennyk

There do exist industry standard risk ratings, such as the ESMA rating system, but many financial firms will use their own systems which have slightly different methodology. For instance:

Irish Life

New Ireland

In most cases such rating systems are conceptually similar, in broad terms, but they'll often consider different factors or give more or less weight to certain factors and might rate certain products rather differently as a result.

athlone573

They dont make it easy to compare do they?