The amount of retirement income employees can buy with their now depleted assets is not supposed to change too much, since they can buy the same monthly annuity with less cash. That's fine, but many investors shun annuities in favour of registered retirement income funds. Financial consultants suggest moving to a more conservative strategy, reducing equities and increasing cash and bonds. Conventional wisdom says that equities are too volatile while bonds and cash are much less prone to fluctuations. This reasoning is flawed.
Statistics show Canadian bonds can have greater volatility than Canadian equities.
Cash, meanwhile, has lower volatility than both equities and bonds. Two British researchers, Philip Booth, a senior lecturer in actuarial science at City University in London, England, and Yakoub Yakoubov, a senior investment analyst with Aon Consulting, also in London, recently wrote a paper that demonstrates the flaws in traditional investing principles. This means that positive differences, or greater than expected returns, produce the same volatility as negative differences. Booth and Yakoubov determined that using a statistical measure called semi-variance to measure risk would focus on the savings goal rather than positive and negative returns. The concept is to develop a goal for the desired level of retirement savings based on current account balances and future planned contributions.