May 22, 2013, 02.50 PM | Source: Moneycontrol.com
There are several important reasons why one should take significantly less investment risk during retirement than before retirement.
Anil Rego (more)
CEO & Founder, Right Horizons | Capital Expertise: Mutual Funds ,Tax ,Property
There are several important reasons why one should take significantly less investment risk during retirement than before retirement. People need to stretch their retirement wealth as far as possible and should invest most of their funds conservatively. Investing aggressively would offer them the likelihood of financial windfall but it also raises the prospects of inferior results or outright losses. This is generally not a good trade-off for retirees on tight budgets.
Ideally a person should not invest the following instruments to avoid taking on higher risk:
Stocks: Known for its High Risk-High Rewards potential, but it can go the other way around also with the high risk of losing one’s capital. A person in his retirement should preferably avoid investing in stocks since stock markets are prone to volatility and there are high upwards and downward movement in the market. It could also lead to erosion of ones savings. 2008 was an unpleasant reminder to stock investors that companies and markets that were thought to be only "somewhat risky" can indeed be extremely risky. But if one is about dabbling in stocks, then the investments should only be in high quality stocks that can be held for the long term and which tend to provide dividend in a consistent manner.
There are some types of stocks which should be avoided at all costs, viz.:
Real Estate: Even investing in real estate could be risky at times, due to reasons like political tension or natural disturbances, wrong selection of location, dropping real estate prices due to market conditions and so on. It is very important to understand the concept of opportunity cost while investing in real estate. Real Estate in the long tenure has the potential to provide exceptional returns but by blocking such funds a person also does not get to enjoy such funds today and that is not ideal for a retiree.
Corporate fixed deposits: These should also be avoided as these are usually issued when the company is in dire need of funds and such there is always the risk of liquidation and no certainty of fixed returns. It is always better to invest in fixed deposits issued by banks, as there is huge security backing such deposits and the risk of default is negligible.
The best investments during the retirement phase are the ones which provide fixed returns and are safe from recession and market volatility, such as bank fixed deposits, savings account, pension, debt mutual funds, government securities, etc.