How should you invest your retirement money?


Most agents want your money invested in funds that they can earn a commission from

Based on my experience, most agents are not highly skilled in assessing investment instruments. They pass a couple of mandatory exams. But they cannot explain simple quantitative risk measures.
Typically, they will show you a snapshot of how a fund performs over time. This is tricky. A study by Cass university shows how fund performances lack persistency. i.e. If you buy a loser, the chance of outdoing a winner next year is higher. Simply put, there is a return to average. It is a simple, yet stubborn principle.
Most fund returns are not persistent
In this study – Why Does Mutual Fund Performance Not Persist? The Impact and Interaction of Fund Flows and Manager Changes, it was concluded that the performance of the worst performing funds experiencing both the replacement of the fund manager (internal governance) and high outflows (external governance) enjoys a subsequent increase of 2.40 percentage points in the following year, relative to loser funds not experiencing these effects.
If statistically fund performance are not persistent, it makes more sense to just buy the cheapest index funds. “The persistence of performance among past winners is no more predictable than the flip of a coin,” said Peter Westaway, Vanguard’s chief economist in Europe.
The next step
  • You should go direct. Skip agents and save cost
  • You should have a longer time horizon. If you don’t have at least 10-year horizon, go for simple banking deposits.
  • You should go for index funds that are cheap and broadly diversified, preferably cash based index funds and not diversified.

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Top performers definitely do not remain at the top.