[Square] Four Misconceptions About Pension Investment

Yoon Chi-seon, Research Fellow at Mirae Asset Retirement Research Institute

Recently, the number of people starting to invest with pension assets has been increasing. This is certainly a welcome development, but there are some misunderstandings that raise concerns. We explain the main misconceptions and highlight important points to remember when investing pension funds.

The first misconception is the belief that "managing pension assets only requires focusing on returns." This overlooks the importance of risk. Returns matter only as long as the risk taken is manageable for the individual. For example, if you plan to withdraw your pension starting next year, is it okay to invest most of your assets in stocks? Few people can confidently answer yes. Even with the same assets, risk can vary depending on the investor. Therefore, it is necessary to consider whether the risks associated with the assets you are considering align with your investment knowledge, investment horizon, and risk tolerance.

The second misconception is the idea that "it is better to limit investments to familiar domestic assets." This may have been true during South Korea’s high-growth period, but now the country has clearly entered a low-growth phase. Corporate competitiveness is not what it used to be. In areas related to innovative technologies such as the Fourth Industrial Revolution, many domestic companies lag behind competitors from countries like China. Staying only within the domestic market in this situation means taking on excessive risk.

To avoid such risks, investment targets should be expanded overseas. In particular, consider including global blue-chip assets that can steadily grow while overcoming market volatility. Examples include global assets and industries that benefit long-term from demographic and social megatrends such as aging populations and the Fourth Industrial Revolution, as well as global REITs (Real Estate Investment Trusts) that generate steady cash flow.

The third misconception is the belief that "investing should be done by anticipating price changes and timing the market." However, accurately predicting market ups and downs is not investing but prophecy. While you might get lucky a few times, consistently timing the market correctly is impossible. What matters is maintaining a certain level of long-term returns even if you cannot predict market fluctuations. To achieve this, managing volatility is essential.

Why is volatility management important in long-term investing? Consider two investment options, A and B, both with an arithmetic average annual return of 5%. Investment A has a volatility (standard deviation) of 15%, with returns of +20% when the market rises and -10% when it falls. Investment B has a volatility of 35%, with returns of +40% and -30%, respectively. If the initial investment is 1,000 won, what will the investment results be after 30 years? Investment A grows to 3,172 won, while Investment B shrinks to 739 won. This shows that investments with high volatility are more likely to yield poor results over the long term.

However, managing volatility requires asset allocation and portfolio adjustments suited to the situation. It can be difficult for ordinary workers to do this on their own. In such cases, automated investment systems can be very useful. Representative examples include Target Date Funds (TDF), wrap accounts, and model portfolio (MP) insurance products offered by financial institutions.

The final misconception is the belief that after retirement, pension withdrawals should be managed only with principal-guaranteed products. This is not suitable in the current era of ultra-long lifespans and ultra-low interest rates. The withdrawal period has increased significantly compared to the past, while the returns on principal-guaranteed products have dropped sharply. This does not mean one should recklessly invest in risky assets. Large investment losses during the withdrawal period can make it difficult to recover assets. During this time, a portfolio that manages volatility appropriately while seeking returns above inflation may be a good alternative. Specifically, consider including income-type assets that generate steady cash flow exceeding deposit interest rates. If building a portfolio on your own feels difficult, products like Target Income Funds (TIF) can be utilized.

This content was produced with the assistance of AI translation services.