How does the risk management or added safeguard work for Retiready Solutions 2 to 5?
Updated 31 October 2018
There are four Retiready Solutions, each designed to match a different risk level:
The Retiready Solutions 2 to 5 manage risk in two ways:
This is the principle of not putting all your eggs in one basket. Diversification helps reduce risk by spreading it across different regions, types and size of company – the idea is that if one type of investment goes down in value, the others won’t necessarily fall as well or may even go up in value. The losses of one are offset by gains in others in other words.
Each Retiready Solution invests in a mix of different investment types (company shares, government and corporate bonds, cash and property from the UK and overseas). The amount of risk that each Retiready Solution is exposed to is in part determined by this mix of investments. Retiready Solution 5 invests more in higher risk investments like company shares than Retiready Solution 4, which in turn invests more in shares than Retiready Solution 3 and so on. Similarly, Retiready Solution 2 invests more in lower risk bonds and cash than Retiready Solution 3, which in turn invests more in bonds and cash than Retiready Solution 4 and so on.
If the added safeguard is not triggered, then each Retiready Solution will be invested fully in the diversified portfolio appropriate to the level of risk it’s targeting.
The added risk management safeguard is designed to cushion the fund from the worst of the falls in the event of a sudden and sustained market drop like we saw during the credit crunch, although there's no guarantee it will do so.
Each Retiready Solution incorporates an added risk management safeguard. In simple terms, it works by triggering a 'de-risking' event when the funds’ volatility’* breaches a certain pre-defined limit. This de-risking involves removing 20%** from the diversified portfolio and putting it into safer investments like cash. The de-risk trigger is higher for the higher risk Retiready Solutions.
When market volatility comes down to within the acceptable level for that solution the fund will gradually start 're-risking' which means it will start to move out of safer investments and into the diversified portfolio again until it's fully invested. It does this more gradually in steps of 5%** at a time.
* By ‘volatility’ we mean the extent to which an investment’s value goes up and down. Historically, company shares (also known as equities) have been more volatile than government or corporate bonds (loans issued by governments and companies which pay interest).
**BlackRock may choose to use its discretion to de-risk or re-risk by amounts other than those stated.
Please be aware that the above only applies to Retiready Solutions 2 to 5, not to Retiready Stability.
There's no guarantee that the Retiready Solutions will achieve their objectives. Their value can go down as well as up and you could end up with less than the amount invested.
The added safeguard is designed to cushion the impact of extreme and sustained market falls, not to prevent falls altogether. In certain circumstances, the Retiready Solutions may miss out on potential growth that similar funds without the safeguard benefit from because they:
- re-risk gradually, making them slower to react if markets bounce back quickly.
- can de-risk when markets are growing, if volatility is high.