Even with good advice there can still be risks

Bill and Hillary had been saving hard for retirement for 15 years. Most of their money was in a New Zealand equity (shares) unit trust.

In most years they got a reasonable return. But two years ago, they were disappointed when the value of their units declined by 8%. Acting on advice, they withdrew their $50,000 of accumulated savings and put it into an international bond trust. They were told this was safe and would produce annual returns (after fees and tax) of about 6%.

Unfortunately because of rising interest rates, the bond trust went down in value by 1% last year and the NZ equity trust increased in value by 21%.

Bill and Hillary are pulling their hair out. They’ve learnt a painful lesson on the dangers of putting all your money into one kind of asset. They've also learned that markets go up and down, and to get good returns you have to patiently endure the downs.

With only 10 years to go until retirement, they decide they can’t afford any more losses. They decide to get their act together and get their money sorted.

They do their research and realise they need a well managed, balanced fund that spreads their risk across different kinds of assets. The talk to an adviser who came highly recommended by a friend, and work with her to narrow their choice to three different balanced funds.

They look at the average performance over all three funds for the past 5 years. There isn’t much difference. They select one for three reasons:

• Its returns are less volatile which indicates a lower risk approach
• The fees are slightly lower
• They read an independent assessment that says this company has a well established and experienced investment team and is associated with very well regarded overseas investment managers.

Now Bill and Hillary are confident that with the balanced fund, incorporating a mix of New Zealand and overseas shares and bonds, their future returns should be more consistent. They have learned the lessons not to switch money based on one year’s result and to spread their money over different asset classes. It has cost a bit in fees, but they now plan to stay with the balanced fund for many years.