Sticking with low-yield assets will erode your spending power over time

A dilemma all investors face at some time in their investment journey is how much risk they are prepared to take with their money. All the evidence shows that, over a medium to long-term timeframe, the horizons pensions typically operate under, being overly conservative is counterintuitively the highest-risk decision an investor can make. Sticking with low yielding assets such as deposits and inflation will erode your spending power over time.

An analysis of the probability of a loss from the MSCI World Equity and Large Cap Index over the period from 1972 to 2025, showed that over the first year, the chance of a loss was 50 per cent, but that over three years that dropped to 20 per cent. By year 13, the chance of a loss fell to zero.

Contrast that with figures showing that corresponding average stock market returns over the same period were about 9 per cent, or about 5 per cent net when adjusted for inflation.

Investors are not always logical, of course. Loss aversion theory suggests that the psychological pain of losing something is roughly twice as intense as the pleasure of gaining something. Those figures above also smooth out the numerous ups and downs in the market and not everyone has a long window to take advantage of the opportunity of long term high returns.

“Historically, equities have provided the strongest long-term returns, but they are also more volatile. Investors need to determine whether they can stay invested during periods of market turbulence. If someone believes they would panic and move to cash during a downturn, then a lower risk approach may be more suitable. This may include bonds and cash along with equities,” suggests Cian Morrissey of Morrisey Wealth Management.

“In my annual planning meetings, I often refer clients to what the American financial adviser Nick Murray calls the ‘Lifeboat Drill’. We know bear markets will happen eventually. The question is not whether markets will fall, but what you are likely to do when they do?”

Timelines are a crucial factor when considering risk. A 45-year-old with 20 years until retirement can generally endure more volatility than someone approaching retirement and risk tolerance is not fixed and should be reviewed regularly, Morrisey notes.

“One mistake I sometimes see is people taking excessive risk because they feel behind on where they think they should be for retirement. Chasing returns through concentrated positions or speculative investments can often do more harm than good.”

“Pensions are basically long-term savings plans and they make sense when there is a long time horizon to retirement, which can grow your pot and benefit from investment returns, but how you invest your money will depend on your attitude to risk,” says Kristen Foran, national sales director of Zurich Life Assurance.

Foran suggests that investors use a risk profiler tool, such as the one provided by Zurich Life, which can help you understand more about investment risk and what levels of risk you feel comfortable with. Based on your answers it will categorise you into one of a selection of risk profiles and will also typically suggest some funds that are suited to you that you can discuss with the help of a financial adviser.

Research shows up interesting insights into the risk appetites of different groups of people.

A recent survey of 1,000 retail investors in the UK by JP Morgan Personal Investing revealed a much higher risk appetite among younger investors than older ones, with 91 per cent of Gen Zs expressing high confidence in financial markets, compared to 61 per cent of Gen Xers.

Gen Zs revealed that they were very keen to invest in the AI boom and crypto assets, such as Bitcoin, as well as gold, also featured strongly in the investment plans of younger investors. These assets, which can be volatile and high risk, are regularly tipped online and Gen Zs revealed that much of the information that informed their decisions came from social media, including online forums such as Reddit and financial influencers known as “fin-influencers”.

Meanwhile, research also suggests different attitudes to risk between men and women. Studies in the US have consistently shown that women typically have a lower financial risk tolerance than men. One study revealed that men exhibit significant overconfidence in their investing ability, leading them to trade more frequently than women. Men’s overconfidence was found to be misplaced, however, with their speculative risk taking reducing their returns relative to women, who benefited from a more disciplined “buy and hold” approach.