I am focusing on financial investments, as that is my field of expertise and it is also an area that is not difficult for you to handle, both now and later when you get older. I have eliminated alternative investments such as buying real estate to rent out or buying into existing businesses that generate income, as I have limited knowledge of these areas. If you have the time and knowledge, it could be worth you considering these as alternatives.

In order to make it easy, I will present to you a solution that is acceptable and will in most circumstances provide an outcome that is more successful than more complex alternatives.

The baseline is to keep the risk and reward in balance. If you take no risk at all in your private pension savings, your money is very secure but you are also very sure to get a very low return on your assets.

Throughout history, an investment in a diversified portfolio of stocks has always given a positive return over a long period. So history teaches us that we should have part of our investments in the stock market, at least in the phase where we are still working and accumulating rather than withdrawing capital.

It is not an easy process to educate yourself to become a professional investor on the stock market. However, I recommend that everyone obtain basic knowledge about how it works. But even if you find it interesting, I do not recommend that you start to speculate on the markets with your pension money.

The reason for this is that stock market investment is not a rational game and the odds are stacked against those who don’t have long experience and knowledge. Anyone can take the steering wheel and do well during the good times, it is when the going gets tough that the problems start. The markets are a never-ending emotional fight between fear and greed, and if you want to have an easy life, you should place yourself in the backseat and not follow this drama to closely.
Even if it might sound harsh, one of the most important pension savings rules is that you should find a way to keep yourself away from the daily operations.

You can find a comfortable backseat position either by selecting a manager who does the job for you or set up your own solution through a few easy steps.

Whichever alternative you go for, there are two extremely important points:

A. Reduce your risk by owning many different stocks, preferably not only in one country. Also, you should have one part in government securities.

B. Keep the annual management fee low.

Here are the easy steps for doing it yourself:

1. Put a part of your savings in bonds or bills, guaranteed by the government of a stable country

2. Put the rest of your savings in LOW FEE index funds on several major stock markets

3. Adjust the balance annually towards a lower portion in stock market investments, the closer you come to your retirement date

This is a very easy solution and the outcome will always be acceptable, actually very often better than if you hire someone to manage your money. The reason for this is that higher fees eat up a lot of your savings and performance results during the years.

In the end, what matters is the total amount on the bottom line, but that is not fully known or secure until you exit your stock market investments. However, you already know the cost that has to be paid regardless of the outcome and that will affect your result on the bottom line. If you pay 1% extra per year in fees over a long time period, it will end up being a very big amount that can reduce your total amount of money by 30% or more.

If you keep the management costs down to a minimum and you accept securing the average return of the stock markets as being reasonable, then your result on the bottom line will be better than the return from many stock market managers whose fees would be paid by you. For some people, it might feel comfortable that a lot of your money doesn’t end up in the pockets of some banker that you are not sure is contributing to your profit.

I am not saying that it is a bad idea to hire a manager who can create a higher return. There are many very skilled managers out there. The problem is to find them and even then, you have to live in uncertainty as to whether they will continue to deliver a good return with acceptable risk.

An index fund uses computers to automatically secure an average return and that, plus their big size, is the reason they can keep their annual costs so low.

The Easy way to get started.

Find one of the bigger players that provides LOW FEE index funds. There are funds charging around 0.10% per year with no strings attached. You should also check the Total Expense Ratio, which includes all costs incurred by the fund such as auditing, management fees and other operational expenses. The lower the TER, the better.

You need to decide how much you should have in the stock market and how much you should have in government bills or bonds with short term maturity. Many index fund providers also have such low cost funds. The precise balance depends on your tolerance for risk and how many years there are left before you plan to use your money.

As a general rule, you should shift the balance from stock market towards government bills and bonds the closer you come to the day when you are going to start using your money.
But as you will spend your money gradually over a long period of maybe 30 years, you should consider to still have some of the money in the stock market on your retirement day.

If you want to reduce your risk, your stock market portion should be divided between different markets. An easy solution is to find an index fund covering the world markets into which you, for example, can put 80% and the remaining 20% into your home region/country’s stock market.

An alternative is to create a mix of a few different funds which cover different markets, such as Europe, USA and Emerging Markets.

There are no fixed rules on how much you should have in each market but you reduce your risk by diversified investing into several markets.

You should also consider where you are going to live in the future so you don’t have most of your assets in another currency, risking an unpleasant currency loss, since currencies can fluctuate a lot over the years.

This is not investment advice, it is for general information and education purposes only.The information published on this site should not be relied upon as a substitute for personal financial or professional advice. Please contact a qualified advisor who is neutral, preferably paid by the hour and who understands your legal and tax situation. Also please be sure that you understand the situation fully before you make any investments.