For a top-notch pension plan, consider these 4 factors

Asset allocation

First on the list of risks to consider is the asset allocation in your portfolio. Since almost 90% of a portfolio’s long-term returns are determined by asset allocation, this important decision should take into account the asset allocation of your investment portfolio and your pension fund. .

Do you know which investment option your super fund is invested in and what that option consists of? Each super fund has a different definition of a growth profile, balanced and conservative, so it is important to ensure that it matches your current risk profile.

This is especially important in the near future, as super funds decide whether to make any changes to strategic asset allocation to improve their scores against the APRA MySuper benchmarks released on July 1.

While you’re at it, check out how your super fund has performed against the benchmark and ask yourself if you would be better off with another super fund that has shown stronger performance over the long term.

Mitigate the risk

The next element should be the mitigation of the risk of sequencing. This is a relevant risk in times of low or low market returns and most affects investors on both sides of retirement when a portfolio is exposed to potential losses due to market volatility and financial losses. withdrawals from the portfolio.

One way to mitigate this is to ensure that a portfolio is properly invested in defensive assets such as bonds. These help cushion losses due to potential stock market declines, even in the current pandemic-induced low-return environment, when the risks of depending on a concentrated high-income portfolio may never have. been also great.

Another approach to mitigate the risk of sequencing would be to temporarily reduce your expenses while reducing your portfolio balance. It could help relieve financial stress and help get through the crisis. Once the markets have settled, spending plans can be readjusted.

Loss aversion

This brings us to loss aversion. The principles of loss aversion could explain why some investors insist on an income-driven strategy for their investment portfolios, seeking to use only income generated by dividends and interest to meet their spending needs.

For some, considering withdrawing from the principal portion of the portfolio results in a feeling of constant loss.

But changing your mindset to think of your withdrawals as regular paychecks instead of withdrawals from savings might help reduce those feelings of loss.

Another way to combat loss aversion might be to withdraw larger distributions less frequently.

Social distancing as a strategy

And the last factor – the emotional risk. If there’s one lesson to be learned from the past 18 months, it’s that volatility is here to stay.

Although the term social distancing has only recently been introduced into our everyday vocabulary, it is also useful to extend this new habit to your investment portfolio.

The best course of action during times of market volatility is to stay the course and control emotions rather than giving in to short-term noise.

Staying focused on the long term, rather than giving in to the emotional tug-of-war caused by market volatility, involves reviewing your goals and the reasons for your specific asset allocation, without reacting to the daily headlines.

This will put you in a good financial position for the time of retirement. And when that time comes, don’t forget to tell yourself that it’s okay to use this same discipline to use your savings to live the life you had planned.


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