Are You Taking Too Much Risk With Your Investments? (by Ray Prince)

One of the most common situations we come across month in month out, is a new client in their 50's coming to us with a collection of policies, often worth considerable amounts of money.

In some cases, our office table groans under the weight of various policy documents (only kidding but I'm sure you get the point) amassed over many years. What is extremely worrying is that in virtually every case, here is a client approaching retirement who is taking far too much risk with their investments!

What is more, they have no idea that this is the case at all.

They may say something like "I was told by the adviser who sold it to me that it was safe because it is in a managed/diversified/with profits fund". Having then put the document in a drawer, it does not see the light of day again until the client feels that he/she should see "how it's doing".

Now, we are all human, and so we accept the fact that they don't know what they don't know, just as a dentist telling us about a problem with our teeth we did not know we had until our regular check up.

However, since this is a continuing huge issue that has the potential to ruin a dentist's/doctor's retirement plans, let's look at a recent case as an example.

Mrs Jones (name changed) has not seen her adviser for many years and decided to approach us having been to one of our talks and having received the newsletter for sometime.

She has various PEPs, ISAs and Pensions worth £200,000. Aged 54, she plans to semi retire at 55 and fully reire at 60. Working only 2 days a week from age 55 to 60, she has lots of places to visit in mind, and this pot of money will help her achieve this.

Readers of this newsletter will (hopefully) know about the term Asset Allocation. Basically, this is the percentage that you have in equities/property/bonds/cash, and is absolutely vital to get right.

Very simply this is because you need to be comfortable with the amount of volatility inherent in every portfolio. If markets dive, will you panic as you see your portfolio value plummet just when you need it?

Secondly, since we build cash flow forecasts for clients, which compare their goals to their assets, the idea is you can have a portfolio designed to achieve your goals with the MINIMUM amount of risk.

Mrs Jones duly filled in her risk questionnaire and expenditure template, and we built her cash flow forecast. It turns out that to achieve her goals the amount of exposure she requires to growth assets (more risky) is 40% of her portfolio. She is shocked to find that currently her exposure to growth assets is 98%!

So what would this mean in the real world for Mrs Jones?

One of the most volatile investment periods in modern history occurred in 1973/74. If this were to happen again, then her £200,000 on New Years Day in 1973 would be worth approximately £62,000 by New Years Eve 1974. Even after the market bounced back in 1975, showing huge gains, £200,000 would still have dropped to £155,000 by New Years Eve 1975.

However, if Mrs Jones were in a proper risk assessed portfolio with a disciplined approach to rebalancing (#) and a 40% exposure to growth assets, the drop over two years would be to around £163,000, and at the end of 1975 it would stand at £271,000.

That is a staggering £116,000 more. More importantly, it means peace of mind for Mrs Jones, who is secure in the knowledge that she has minimised her risk, and can simply get on with arranging her holiday of a lifetime to Australia.

The Financial Tips Bottom Line

If you are within 10 years of retirement, get a check up before it's too late! Even though you may have experienced good returns from the recent rise in world markets, don't make the mistake of thinking that shares may not fall in value as well.

# Please note the figures used presume Mrs Jones would rebalance her portfolio at reviews held on 31st December 1973 and 1974. Rebalacing is an extremely important investment discipline normally
done annually, whereby if Mrs Jones is happy to have an exposure to growth stocks of 40%, and these stocks fall heavily in value meaning they represent say 22% of her portfolio, she then sells other assets in her portfolio to take this back to 40%. In this case of course it meant buying equities at a low price, and seeing these stocks then rise in value in 1975.

ACTION POINT

Check exactly what investments you have. What percentage is in equities and property?

If (say) it is more than 80%, you could have too much exposure than either you need, or for your comfort levels.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.

Just visit http://www.medicaldentalfs.com to get your free retirement planning guide.

Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.