Q: Last year, I invested into a low risk pension fund with a risk rating of 3. It performed fine, but some of my work colleagues were in a risk rating 4 fund and made much more than I did. I don’t want to make the same mistake this year, so I’m thinking of moving everything into a higher risk fund, what do you think?
A: The signs for 2020 are reasonably good and in a couple of weeks’ time I’ll be giving you my predictions for the year ahead.
But despite that, you need to be cautious as well. If you feel you want to increase your exposure to a higher risk fund, I believe a good play when choosing to transfer all or a specific amount from your current fund, the strategy most investors adopt is to increase their equity holdings to a half way point, which is somewhere between the maximum amount they would hold in equities and what their average exposure is.
Let me explain.
The typical equity holding for a fund with a risk profile 3 is about 40%. A fund with a risk rating of 4 holds c. 60% in equities and a risk rating 5 is 79%.
So, if you wanted to increase your exposure to a risk rating 4, the amount you should transfer over is 10% of your current fund i.e. 50% of the difference between what you currently hold in equities and the up-lifted amount.
If the value of your fund was for example, €100,000, then you should transfer €10,000 to a fund with a risk rating of 4 and leave €90,000 where it is.
If you wanted to move some of your fund up to a risk rating 5, then your midway point between your current holding and a risk rating 5 is 19.5% (79% - 40% x 50%) so you should transfer over €19,500 and keep €80,500 in the fund with the risk rating of 3.