MiPlan offers a unique range of funds spanning the risk spectrum which have been set up to target certain outcomes or objectives, based on various investment time horizons:
What assets to invest in?
In deciding how to invest, you need to know how the assets classes you invest in behave over time. The graph below depicts returns from cash, bonds and equities over discrete periods ranging from one to ten years.
Note: Annualised financial data from 1925 to 2016. Past performance is not a guarantee of future results.
Source: UCT Graduate School of Business; INet.
The graph reveals that as your time horizon increases, the risk of holding a risky asset, such as equities, decreases significantly. In other words, the longer you are invested in equities, the lower the volatility (risk) and the more likely the asset class will outperform other asset classes. This is important as it defines how to best use a “risk budget” within your financial plan.
What is risk?
Typically, your risk appetite is determined by a questionnaire or test which attempts to evaluate your tolerance of risk. Some of these approaches, whilst well meaning, are fundamentally flawed in that they fail to inform you of the key benefit associated with risk diversification over time. We advocate time-based risk management which focuses on your time horizon and as opposed to your emotions to risk – being too conservative can be far more damaging to your financial plan and needs than you may imagine.
This link between risk and time is a fundamental concept to understand when investing. The cash flows you have to invest (wealth creation) as well as the cash flows you will require during retirement (retirement income), and any other income requirements.
How to invest
Ideally, your cash flow requirements and contributions should be matched to a range of funds which correspond to various return objectives, risk profiles, time horizons, and asset allocation flexibility. This is the underlying philosophy behind the process of MiPlan’s financial planning software – the allocation of annual investments between funds with various investment time horizons and risk profiles whilst accounting for withdrawals. This process allows for more efficient use of risk with greater certainty of outcome.