Separate Safe Investments from Risk-Based Investments

You need to separate your safe investments from your risk-based investments in retirement. This I learned from Greg Heiple of the Teeter Totter Principle. TTP is a simple method of helping you balance your safe investments like cash and fixed interest against your risk-based investments like equity mutual funds and stocks.

Greg gives a very real example of the traditional way of managing your nest egg egg in retirement. Try playing with his Free TTP Responsibility Calculator to get a “feel” for what he is talking about. Also take a look at the Teeter Totter Principle presentation.

What should strike you about it is the simplicity of it all. But there is more to it than that.

If your retirement funds are in a balanced full diversified properly asset allocated WRAP Account then maybe 50% of your money is in some form of fixed Interest or Income Funds or Cash. These are relatively safe investments as they normally do not change much over time.

There are two problem with this in my view. First you may be paying fees of 2% or more (I was) on this money, which is simply sitting in fixed interest funds or cash. Second because these funds do not fluctuate in value very much over time, it dampens the effect of any risk based equity fund investment volatility. I read just today the financial world telling us balanced funds can expect to be down about 6% over the year.

But the stock markets are down 20% or more, so what gives? This is hidden by the flaw of using averages and gives you a false sense of security. This is why you need to separate the performance of each asset class. A business looks at each department’s profitability and decides what to do about non-performers and so should you with your asset allocations.

I know all the hype about a fully diversified portfolio that is bought and held for the long term should help protect you from the downside. But in order for your portfolio to recover and grow after this down-turn, it is your equity funds that are going to have to do the heavy lifting just to get back your lost capital.

Your fixed interest funds may well contribute (especially in Australia where we have high interest rates) but they are there to smooth out the ups and downs of your nest egg, so you don’t get too concerned.

In retirement when you are drawing a pension of say 4%, your nest egg sees that as a loss of capital and in the early years you need to try and make up that loss. So the equity funds have to recover that “loss” too.

In retirement Rule #1 is to avoid large losses. This should be extended to mean avoid large losses in your equity funds which is the growth engine of your nest egg that needs to recover losses quickly in the short term, to maintain your capital and provide returns in the long term, to grow your nest egg if possible.

By separating your safe investments from your risk-based investments you can easily see what is happening and do something about it. It’s responsibly managing your nest egg in retirement that is important.

The benefit of doing this will allow you to halve your fees and have some cash and fixed interest safe investments in your direct control you can use to pay yourself a pension with, if the stock market takes a bath and drains your risk based investment funds.

Your peace of mind and health is also important and should not be jeopardised by you having to worry about the volatility of the markets and whether you can draw a pension in any one year or not.

Remember everything changes when you retire or semi-retire and don’t have that regular salary to rely on. Make sure you learn to manage and protect yourself and your nest egg.

Please note I am not a financial planner and this is not investment advice. You should talk with your trusted financial planner about anything you read on this site and check if it is right for you personally.

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