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Eleven unpublicised facts that define modern day retirement solutions

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There are eleven facts about retirement solutions that you must understand before implementing any sort of investment strategy.
  1. Financial markets are incredibly complex. They are difficult to interpret and predict. And yet, our understanding of financial markets is grossly over-simplified.
  2. Standard theory assumes that markets are rational machines where risk is defined by the up and down movements of prices. The need to measure and predict risk has lead to elegant mathematical proofs, which in turn have been used to develop fancy economic models.
  3. Current models take a highly manageable view of financial markets. These models are used by experts to manage assets, construct portfolios and offer retirement advice.Unfortunately, the models do not measure risk correctly and I’m afraid to say they need a major rehash. And if the models need a major rehash, our retirement solutions need to change.
  4. Modern day investment theory rests on weak assumptions. According to French mathematician Benoit Mandelbrot, ‘Markets are very, very risky – more risky than the standard theories imagine.’ This begs the question. Has retirement planning taken a holistic view of the risks inherent in financial markets?   
  5. Standard models do not measure risk accurately. As a result, retirement funds are subject to extreme ‘financial turbulence’
  6. Market crashes will happen again in future and people will be responsible. And when greed gets into the mix, you just may have yourself a ticking time bomb. The 2008 sub-prime crisis is testimony to this. 
  7. People move financial markets. Think of it this way. Markets incorporate thousands of different needs, ideas, investing strategies, tactics, goals, objectives and emotions. As an individual you have no control over price changes or capital growth.
  8. It is almost impossible to predict future price movements in financial markets using historical data. Moreover, financial markets are inconsistent and most funds are ill-prepared for surprises. The best retirement solutions protect against losses.
  9. Gloom and doom inspires fear. A friend with a hot tip inspires greed. Following the advice of other people may be harmful to your bottom line. Fundamentally, you need to change they way you invest and conduct business. 
  10. Conventional retirement planning is a complex exercise in risk management and for good reason. If you want financial markets to reward you well, it is imperative that you identify the risks and deal with them appropriately.  
  11. The notion of long-term sustainable returns in financial markets is unreliable. The required returns may not be there in the long-term. If you want evidence, all you have to do is look at the financial health of the thousands of pensioners out there.
Retirement solutions today are ineffective wealth creation tools for two reasons:
  • The risks are difficult to manage and predict.
  • The returns are questionable and dismal to say the least. 

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