So, the experts say, “If you want a healthy retirement then you absolutely have to put your money into the stock market and leave it there.
An oft-repeated piece of advice is that if you don’t keep up with annual inflation by saving huge amounts of your income every month into a contractual offshore savings plan for at least the next 25 years, then you will almost certainly spend your golden years in abject poverty and despair.
The fact that between now and then you will have a miserable quarter of a century with no spare cash at all to spend and enjoy life doesn’t seem to figure in this equation.
Unfortunately life is not an exact science. It is true that some stocks do well over the long term and it is true that we should all be saving for retirement.
But it is equally true that many stocks do not do so well and the percentage return (plus or minus!) depends entirely on events that absolutely no one can foresee or predict.
To make things even more difficult, it is human nature for people to make decisions about money based on fear and greed, and thus do the complete opposite of the ‘buy low sell high’ mantra when things get volatile. As a result, they end up getting locked into a loss.
Some historical facts: In December 1989, the Japanese stock market index stood at 39,000 points. Some 24 years later it a tad over 10,000 – a nauseating drop of 74 per cent.
You may think that’s an extreme example but even the S&P 500 index, a broad measure of the top 500 US companies, reached 1,498 points in January 2000 and currently stands at 1,460, a fall of 2.5 per cent 12 years later.
That’s horrifying if you were invested in it in retirement, (or on the final approach to retirement) thinking it was a safe blue chip investment index. You have been watching your pension pot evaporate – not so slowly – ever since.
Even gold, which has been many people’s favourite investment, especially this year and last, stood at an inflation-adjusted price of US$1,843 an ounce at the end of the 1970s and then took more than 30 years to reach that sort of level again.
In between, the price fell more than 80 per cent to US$322. It is still underwater compared with the ’70s – US$1,650 an ounce today.
If you start with US$100 and your investment falls 30 per cent, you now need a gain of 43 per cent just to get back to where you started, and gains of 43 per cent do not come easily or quickly in any asset class.
It is true that, in some ways, risk is relevant to the investment time frame available to you, but even if you were a sprightly 58 years old and cruising into your retirement when you placed the bulk of your money in blue chip US stocks via the S&P Index, fast forward 12 years and you are now 70 and showing a big loss.
Imagine what that does to your income not to mention your peace of mind.
Of course, investing in equities whether for growth and/or income through dividend yields (so that one at least receives the income from the dividend whilst the stock price goes up and down) can be rewarding, but it is also, as we have seen so often over the years, inherently risky and dependent on market timing.
Equally risky however can be many “model-based” commercial property asset funds where a return is calculated manually by the funds themselves, based on valuations of a physical assets, buildings or commercial property, and the income that is being generated from that asset at the time of valuation.
Such property funds are often offered as a viable alternative to traditional investments. In some cases they are certainly worth considering, but you should be well aware of their possible drawbacks.
Liquidity – being able to sell fast and get your money back – is key nowadays, and most investment vehicles based on this ‘model’ are considered ‘illiquid’ as the fund may own the actual properties and would have to sell them to repay investors who wanted out.
If a large proportion of the funds investors were to redeem their investments at the same time the funds could go into a “lock up” phase, with no one getting anything until the property has been sold.
More on investment property and commercial property funds in future articles.
Jerry Dingley of Property Portfolio Services and business partner Tim Whiteley have been advising expatriates in the Asia Pacific region for more than 20 years. They can be reached by email to info@ifainternationalgroup.com
– Jerry Dingley.
Important Note: This article contains general information only and is not intended to be taken as specific financial advisory, investment, or tax advice. A personal analysis should be obtained before acting or refraining from acting upon any information given.