With so many providers, platforms, funds and products it can be an exhausting process trying to make sense of them all.
But, broadly speaking, you have 3 main options when it comes to the management of your pension. Some require substantial time commitments, while others run on autopilot so it’s important to pick the one that suits the level of involvement that you want to have.
1. Track the markets
If you just want a pension but don’t care too much for investing then this might be the path for you. Once you have an idea of what you want to do, the next step is simply a matter of matching your risk profile to a suitable fund or mix of funds.
Each time you invest you buy a little piece of a portfolio that replicates the performance of an index. You can track well known exchanges like the DOW JONES, ISEQ, FTSE 100 or NASDAQ or you can go for one the many in house options provided by insurance companies.
Investing this way allows you to participate in the ups and downs of the markets over the years without having to make any investment decisions whatsoever. You don’t have any influence over what’s bought or sold and don’t have any other responsibilities or obligations.
You just do your bit by contributing regularly and sticking to the process. It’s as simple as that.
This is known as passive investing and it follows a philosophy that market prices accurately reflect the true value of an item. Proponents of passive investing believe that markets are efficient mechanisms of exchange where all relevant variables are known.
The held belief is that the continual compromise between buyers and sellers, who are actively trading with each other, will eventually form the basis of an agreed price for an exchange.
As a reflection of pure market forces, the agreed price becomes the real value of the asset which is the essence of capitalism and the free market in action.
Summary:
If you’re happy to put your faith in the markets without interference then this is the way to go.
2. Leave it to the experts
Another way is to have experienced fund managers do it for you. This is active investing and it sits at the other end of the spectrum.
Active managers look to beat the market since they believe them to be an inefficient medium of exchange. It follows that buyers and sellers cannot possibly know all the necessary information held by the other party and that this is needed in order for a true value to be determined.
Since an information gap exists proponents of active management believe that markets are inherently inefficient mediums of exchange that offer the potential for gain.
This approach is very different since these managers are actively looking for inefficiencies rather than following the herd. A portion of the money they collect is used carry out research to find companies that are undervalued, or unloved, by the market.
The end goal is to find a gap between what the market says it is worth and what they believe it to be worth. They will take a position based on the information uncovered from their research and act accordingly.
Amongst other things they will study the internal dynamics of the company itself, the market environment it operates in and any other relevant factors from which they conclude if there is potential or not.
They are opportunists and you give them a mandate to look for these opportunities when you invest with them. Since performance is so important, and the fact they don’t just pick companies at random, a great deal of due diligence and research needs to be conducted in advance of any trades made.
Since this is not an associated cost of passive investing, actively managed funds tend to have higher management charges as a result.
There are entire libraries dedicated to the argument of which is better but, in short;
- Actively managed funds tend to do better short term
- Passively managed funds tend to do better long term.
And don’t worry if you’re drawn to these options or find yourself on the fence between them. At the pension store, you get the best of both world’s since you can invest in passive and active funds at the same time if you wish.
Summary:
If you’re looking for the potential to outperform the markets rather than follow them then you might consider this.
3. Do it all yourself
If you think you can do better, or just want complete control over your pension money, then you can appoint yourself as the investment manager if you wish.
This is known as the self invested option. It sounds great but an emphasis really needs to be placed on the word self.
With one of these plans you can invest your money in almost anything you like, subject to some restrictions, terms and conditions.
Since you’re running the whole show now, you get to select your investments and are fully responsible for how they work out. You own all the ups and all the downs. Some people are comfortable with that where other’s are not. You should know if this for you or not right off the bat.
With insurance company products you have a full range of fund options that you can invest in, just like a regular pension plan. Some of the alternatives that can be explored here are the likes of solar power projects, renewable energy schemes, residential property, commercial property, model portfolios and all kinds of other cool things.
The degree of involvement required will depend very much on the kind of things you’re looking to buy. Some options will be entirely dependant on the amount of money you have to invest. If you’re thinking of trading shares regularly then you will need to devote the necessary time to oversee your trades and research your buys.
If you’re thinking of buying a house for sale down the street then this will require a different degree of involvement. Either way, you have the freedom and flexibility to do what you want.
Summary:
If you’re willing to invest the time and assume the responsibility of selecting and managing your own investments then this is for you.
Next steps
Check your situation here and give me a call on 01 4423929 or email me at kevin@thepensionstore.ie if you want to have a chat about it.
Pensions Are Complicated. We’ve Made Them Simple.