So, is it really worth the risk?
ONE word guaranteed to strike fear into the heart of the inexperienced investor is ‘risk'.
A new customer hearing the word ‘risk' thinks that, if things don't go according to plan, they stand to lose everything.
‘What a load of tosh!' as Boris Johnson would say.
Risk is a neutral term, and it's on a sliding scale. Every form of savings or investment has its level of risk, but if an investment is low risk, it is a safe bet, relatively speaking. I'm thinking of products such as a bank current account or a cash Isa, for instance.
As advisers, we ask targeted questions to ascertain the level of risk a client is comfortable with, before we begin to formulate an investment portfolio for them.
Some clients are happy with a little risk; others are risk-averse.
It's surprising, then, that even the most risk-averse client seems happy to allow his pension scheme to invest his life's savings, without asking any questions as to where the money is placed.
Pension schemes invest much of our money in investment funds, but investment funds come in all shapes, sizes, risk levels, and levels of performance.
In its latest report on the performance of the leading investment funds (they call it ‘Spot the Dog' because under-performing funds are known as ‘dog funds'), the research company Bestinvest has identified 86 funds that have failed to meet their targets in each of the last three years. Are you sure your money is not in one of those funds – or are you running the risk that it is?
These under-performers include 12 ‘mega-funds' run by household-name companies, each of which holds over £1 billion in assets.
Put another way, the number of dog funds is up by 12 per cent, but more worryingly, the amount of cash and assets slushing about in these funds is up by 54 per cent. Could this include large slices of your retirement savings?
If your money is invested in a dog fund, you are missing out on the strong growth you might otherwise have had if your money had been invested in a top performer.
Just to put that in context: during 2021, in the red valley of tears that was Covid and the global economic downturn, the worst UK fund rose just 0.5 per cent, but the best one rose 39.4 per cent. Staying with the Boris Johnson metaphor: no question which bus you want to be on there.
The good news is that it doesn't have to be this way. You can jump ship out of a lacklustre fund and get on board a super performer. This is where your friendly local financial adviser - his cape billowing in the wind – steps in.
As financial advisers we have access to the performance details of each of the investment funds where your money could be invested. We can look inside your pension and, if it is not optimally invested, we can switch you out of under-performing funds and place your savings in this year's top performers.
An annual pension review of this kind will literally ‘turbo-charge' your pension like a car engine, and make sure it is running at maximum efficiency. We make sure that, year on year, you are achieving fastest possible growth in your pension.
The difference over the decades will be amazing, and can dramatically improve your standard of living in retirement.
On the other hand, you could just leave things as they are, and trust your pension company to make your decisions for you.
But is that worth the . . . risk?
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice or at www.mkennedyfinancial.com