De-risking investments is not simply about selling equities to buy bonds.
Many pension funds following a de-risking plan are still relying on some significant bets to see them through – and hoping that luck is on their side. The majority of de-risking strategies involve selling growth assets (often equities) and buying matching assets (mostly bonds) when the time is right, often when a funding ratio trigger is hit.
But what happens if equities don’t go up? Or interest rates fall? The overall picture just gets worse. Because you are taking too much risk already, the deficit starts spiralling out of control.
We believe that rather than just investing for the good times, it is important to consider the impact of the good, the bad and the different. What happens if growth slows down, or we head into another recession?
Diversification is key. Different combinations of investments can be used to deliver positive returns across a range of economic conditions, which in turn helps to add balance to your portfolio.
In this article we look at other ways in which pension schemes can reduce the risk held within their portfolio, thereby producing a more robust and resilient outcome.