If you had just retired or were nearing retirement at the beginning of 2020 and had an investment portfolio heavy in equities, you must have had a shocker of a few months when the Covid-19 pandemic spooked the markets.
Stocks and stock indices plunged like nine-pins, and losses in your portfolio would have given you sleepless nights. However, US markets saw a sharp recovery towards the end of the year with indices such as the S&P 500 Index and Dow Jones Industrial Average touching record highs as sentiments changed with vaccine discovery and liquidity infused by central banks across the globe and are continuing the good run into 2021.
Is there a lesson for equity investors? There indeed is a lesson to be learned, And that is that stock markets can be volatile and harsh times, but if one is patient, there will be money to be made. No wonder Tesla shares zoomed over 1000% from USD 72.24 on March 18, 2020, to close at $880.02 on January 8, 2021, making its founder Elon Musk the richest man on the planet.
A good investment portfolio should always have a fair sprinkling of stocks along with other asset classes. But does this hold for those approaching retirement or who have already retired? The general prescription for senior citizens is to stay away from the stock market as it entails the risk of erosion of one’s capital invested. Is it time to challenge this proclamation as the economic and social environment around us change?
Equities may not be all that bad for senior citizens if appropriately handled. Here are some reasons why exposure to stock could be beneficial for senior citizens.
Rising life expectancy
For many retirees, retiring at 62 or 65 and receiving retirement benefits is enough. But that is just the beginning of your golden years! If you have taken good care of your health during your working years, you will look forward to enjoying those golden years just the way you did earlier. The only hindrance could be the availability of money to fund your needs and desires.
Though retirement benefits and social security are good enough to live a decent life, many aspire for more comforts, and some even want to explore a few things that they may not have so far. As per World Bank data, life-expectancy at birth stood at 78.5 years in the United States of America and 82 years in Canada.
As medical science and healthcare progress further, there is a fair chance that the expectancy will increase. Is there a ‘risk’ of living longer than expected? The ‘risk’ is the possibility of your retirement income not sufficing your needs, which would include rising medical expenses.
Erosion by inflation
Your retirement corpus may look big when you retire, but inflation will silently erode its value. Suppose you put all your money into a bond portfolio. In that case, the extent of income you generate over the years will exhibit reduced purchasing power even if you keep getting the same return on your bond portfolio, thanks to inflation. The situation may worsen if the interest rates fall further. Over the last 15 years, Bloomberg Barclays US Aggregate Total Return Value Unhedged USD Index has given only 4.4 percent returns.
Since the global financial crisis of 2008, the central bankers across the world, including the US Federal Reserve, have been on a money printing spree to avert a recession.
Covid19 pandemic only aggravated the trend. Increased money supply can lead to inflation. Rising inflation eats into the purchasing power of individuals. For example, as per the US Bureau of Labour Statistics, for the goods that can be bought with a USD 1 in January 2000, one had to spend USD 1.54 in November 2020 – a compounded annual growth rate (CAGR) of 2.18 percent.
To make the situation worse, the interest rates may remain lower than the rate of inflation. This situation of negative real interest rates can further erode the purchasing power of savers.
Exposure to stocks – be it directly or through mutual funds can help you beat inflation in the longer term. Over the last 15 years, the S&P500 index has given 7.48 percent returns.
Allocate to ETFs
Allocate some money to a low-cost index ETF even after your retirement. Suppose you keep aside 15 percent of your retirement corpus in a global equities low-cost index ETF or a mix of ETFs tracking developed equities and emerging equities, depending on your comfort. In that case, there is a fair chance that you would end up with a decent corpus over ten years or more. This fund can then be accessed to meet the shortfall of low returns on the bond portfolio.
Investments in equities are risky in the short term, given the volatility. However, they are rewarding for long-term investors. If investment advisors advocate investments in equities while working, the same will apply during your golden years if you have a long enough horizon of 10 years or more to ride out the stock market cycles.
Money in equity funds can beat inflation and help you have a decent corpus well after retirement when you might need it the most. If you find you have more than you need, maybe you can think of donating some part for charitable purposes to make a more considerable change in society even when you are not around.
Be cautious, don’t go overboard.
Invest in stocks directly only if you feel you have the ability to pick good stocks. Otherwise, choose to go through the mutual fund/ETF route and let professionals handle your equity portfolio.
Also, have a long term horizon for your stock-related investments. Invest that portion of your money that you might not need for the next five years or more.
Only a portion of your investable wealth should be in equities and equity-related products – maybe 15-20 percent – so that you do not get caught on the wrong foot during a prolonged bear market that erodes your wealth.
Finally, do not invest your entire equity portfolio in one or two stocks or funds. In general, diversification with equities among asset classes will help reduce risk during your golden years. Avoid speculative investment and stick to good, steady stocks or funds.
Tiffany Leigh Smith
“Be cautious, don’t go overboard” right yall? This is an investment better learned at an early age though very risky and costly