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How can I manage these risks? 
There are three "tools" that can be used to manage these risks, namely: 


  1. The asset class in which your retirement savings money is invested; 
  2. The time horizon for which your retirement savings is invested (how long); and 
  3. Diversification (not having all your eggs in one basket)


1. Choice of asset class
An asset class like equities has historically given returns significantly in excess of inflation and is therefore a good asset class to hold against inflation risk. But shares also have a greater tendency to go up and down in price (we say shares are more volatile) than many other asset classes. This makes equities a less suitable asset class for managing your "final payment risk".
On the other hand, cash is a good asset class to manage your "final payment risk". Cash, however, does not give you an investment return much in excess of inflation and so it is not a suitable asset class for managing your inflation risk. So, you can do a lot to manage your inflation risk and "final payment risk" by managing the asset classes in which your retirement savings are invested.

2. Time horizon
Whilst shares are the better asset class for managing your inflation risk, it is clear that they can go up and down quite sharply (i.e. they are volatile).
This volatility is most extreme when you invest in shares for a short period. So, if you will be working for some time still before you need your Retirement Fund money, you can afford to invest more of your retirement savings in shares. Even if the market does go down in the short-term it should not worry you unduly because over the long-term investment in shares best manages your inflation risk.

Of course, if you are going to need your money soon, you cannot afford to be over-exposed to the volatility of shares!
3. Diversification
The past has shown that, more often than not, when some asset classes are down (e.g. South African shares), others go up (e.g. government bonds of "developed world" nations) - such asset classes are said to be negatively correlated with each other.
You can therefore reduce your risk by spreading your investments between the different asset classes. The assets invested in Portfolios B and C are diversified over a wide range of asset classes in order to meet this requirement. See the subsequent pie charts.
Click here to use the Asset Allocation model. This model will help you develop a better understanding of:
• The expected returns of the different asset classes;
• The impact of your investment horizon on the expected return; and
• The benefits of diversification.