The more I read about the potential losses suffered by Lehman Minibonds and related structured products investors, the more I realise the importance of asset allocation as you grow older and nearer to retirement age or age where you would want to stop working.

Many of these investors who were near retirement age were looking for safe havens for a decent 5% return but instead are staring at potential losses of up to 100%.

The Monetary Authority of Hong Kong had already referred 24 cases of possible mis-selling to the Securities and Futures Commission for investigation and Singapore’s Monetary Authority of Singapore has also launched formal inquiries into allegations of breaches of law, inadequate internal controls by financial institutions or poor sales practices by their representatives.

One of the issues that has triggered complaints was why retirees or pre-retirees were sold on such risky products? If you were informed that the investment had a possibility of up to 100% losses in return for potential 5% returns, would you have invested?]

Probably not!

Asset Allocation for Retirement

Unlike investors in their 20s and 40s who have a longer time horizon in recouping investment losses (either realised or unrealised), retirees or pre-retirees are near to the end of their economic lives. Some choose to retire why others would be retired by their organisations. It is tough for them to recoup such losses at their age without taking even more extraordinary risks.

Thus, as you and I approach our financial freedom goal and especially if we are working as salaryman or women, you should consider your asset allocation of your investments as you approach the time when you want to stop working and start retirement.

Ideally, you would need to look for very safe investments, i.e. capital is guaranteed or virtually guaranteed which returns you regular income. The asset classes to be considered would tend to be virtually risk-free Singapore Government Treasury Bills or Government Securities such as bonds. These can yield higher tax-free returns than fixed deposits and yet are as safe as Singapore’s sovereign risk rating. I.e. unless the Government of Singapore goes bankrupt, the bonds will be redeemed and the coupons (interest) paid.

However, it is very difficult to find double digit returns on such safe investments.

Some blue chip companies listed on the SGX can yield more than 5% at current prices but the dividend payout is not guaranteed since the company can choose to not pay dividends to conserve cash and reinvest in the business.

Thus, in your quest towards financial freedom, unless you are able to accept the volatility of investing in high-yielding blue chip companies, you may need to rethink how large your investible retirement savings need to be in order to generate the $xx,xxx per year for financial freedom.

Be well and prosper.

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