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Four risks you need to be aware of with your retirement investments

by , 01 July 2015

When you put money to work for your retirement, you face investment risk. This investment risk will depend on what assets you invest in.

It's easy to ignore risk and focus on how much your investments for retirement could return.

For example, if you invest in a unit trusts that's shown good performance over the years, there's no guarantee this will continue.

So what risks face your retirement investments?

Read on to find out…


The impact of company specific risk on your retirement


Company specific risk involves risks that affect a company directly. For example, a company you hold shares in hits hard times.

Your investment could fall in value, Steve McDonald in Investment U explains. And there is a small possibility a company’s share price could fall to zero.

Ensure you spread your buys across a wide range of stocks in different sectors to reduce company specific risk. If you invest in funds, you should already have enough diversification.

If you opt to hold a portfolio of shares as part of your retirement investments, it’s vital you keep an eye on your long-term stocks. Have risk management strategies in place, such as stop losses, so you can sell a share if it’s not performing as you want it to.


What impact would another financial crisis have on your retirement investments?


This is systemic risk.

When the financial crisis hit, the global financial system seized up and it happened quickly, taking many by surprise.

The financial crisis began with many collapses in the financial markets that eventually hit home. This is contagion risk.

When people start to panic, they start to sell and that leads to panic selling on the stock market.


Inflation eats away at your retirement savings


Inflation is one of the biggest threats to your retirement.

The longer you live, the bigger the impact of inflation. And it’s something you really need to take into consideration. Inflation erodes the future spending power of your money.

One of the best ways to overcome the risk of inflation is to invest in shares and corporate bonds. These two assets tend to outperform inflation over the long-term.

By keeping a lot of your retirement money in savings account, you’re letting inflation eat away at your cash.

Bottom line: You need to weigh up the risks facing your retirement investments and make sure you’re taking steps to minimise these risks. Otherwise you could be living on a lot less.

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Four risks you need to be aware of with your retirement investments
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