Volatility and risk of equity in retirement portfolios

Abstract

Financial planners often manage volatility believing that it is the same as managing risk. The FTSE/JSE Top 40 Index (Topi) and the FTSE/JSE All Share Index (Alsi) were used as samples to investigate volatility and risk in equity investments. A target return was determined as a benchmark for required return. The volatility analysis indicated that investments in the Topi and the Alsi were too risky for a retirement portfolio. Five sets of actual investments in the Topi and Alsi were then simulated. The internal rate of return (IRR) of each investment was determined and compared with the target return. This revealed that the risk of each of the five simulated sets of investments was acceptable for a retirement portfolio. It was concluded that volatility analysis of monthly returns was not suitable to determine the risk of equity investments in retirement portfolios.