When it comes to retirement, I do not believe that most people want to invest in some type of lifecycle pension fund if that fund is worth an uncertain future value at age 65 or 70.
Would savers have peace of mind that they have the financial wherewithal to live their retirement years in financial security and comfort if, for example, they have been primarily invested in bonds and cash instruments? Well, it depends on their particular circumstances and the timing of these particular portfolio allocations.
Stocks, bonds, real estate, private equity, commodities, cash and hedge funds have all generated attractive returns in different time periods. However, which asset classes will generate attractive returns in which years is a key issue to deal with. The years and the returns (or losses) can vary considerably. For example, in 2001, real estate and hedge fund returns were a helpful offset to a dismal year for stocks and commodities. In 2003, stocks and private equity had strong gains in comparison with those of bonds. However, in 2008, government bonds and cash were the only places to be for positive returns as the financial crisis hit with full force against all the other major asset classes.
Questions regarding what the future may bring in terms of inflation, market performances, currency movements, personal health circumstances, etc., all have an important impacts on the size of the pension nest egg that will be needed for savers to feel assured that their financial needs will be met in retirement as a result of their decades of personal savings and investments.
We will examine this in more detail in future blogs.