Why you should invest in equities
Aretiree may have accumulated a large sum for his golden years. The real challenge is for him to not outlive his accumulated sum. In a normal wealth accumulation and erosion landscape model, a person will accumulate the sufficient funds for his eventual retirement during his working life.
Upon retirement, where he no longer earns any income, he will begin to draw down his accumulated wealth.
On the other hand, huge amounts of excess liquidity (money) still flood the system US’s past 3 rounds of Quantitative Easing (QE), Japan’s Abenomics and European Central Bank’s own version of QE.
These major central banks’ loose monetary policy find their way into traditional income-generating assets like bonds, thus keeping yields near rock-bottom. Savers will get hurt in the extended low-rates environment.
Retirees who depend on investment income solely from Bond Funds and Fixed Deposits will be hard-pressed not to touch into their principal or capital amounts in their retirement years. With yields now projected to be lower for even longer; this spells trouble for everyone, including the individual who is retiring 20 years from now.
Basically, the lower the interest rates, the more we will need to save for our retirement.
Solution Utilise an Asset Allocation approach in managing your retirement portfolio.
Diversify your portfolio to include growth type of assets which can provide capital-appreciation qualities like stocks.
Over the long run, 10-20 years, investing in stocks provide a better potential for returns that beat inflation.
One of the main drivers of stock prices is earnings. You would have noticed that prices of goods and services are almost always, adjusted upwards.
This is a plain example of how a company’s revenue and profits should at least grow at the same rate as inflation. This will benefit in turn, their stock prices.
Stocks can generally be classified into two groups – Growth Stocks and Dividend/ Income Stocks Aren’t stocks risky? Don’t be restricted by a narrow view and think of risk only in terms of price volatility.
On a broader context, risk is the uncertainty of achieving an expected outcome.
In this case, an extremely risk-averse individual who pile into Fixed Deposits during his working days may find out to his horror that the savings may not be sufficient to last him through his years in retirement.
Not all stocks are created equal and for the uninitiated, investing in stocks does not equate to gambling. In fact, it is far from it.
Steer clear of speculative names and punting stocks, these are usually penny stocks with no fundamentals with recent price gains driven by the rumour mill.
On the contrary, buy into strong names and franchises with solid business models. These can be names you are familiar with, like your local banking giant or famous consumer discretionary stocks that produce every-day products that your consume. Think of it as investing in a business. You are a shareholder, after all.
Take a broader view of your existing investments instead of viewing them individually.
Even if you are a retiree, allocate at least 10-20 per cent of your wealth into stocks. Ultimately, an appropriate allocation depends on your individual factors like risk appetite and your retirement expectations. In our next issue, we will explore more into growth and dividend stocks.
Areca Capital is a niche Malaysian fund management and wealth advisory company. For any enquiries, they can be contacted at 03-79563111 or by email: invest@ arecacapital.com.
Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. Investors are advised to consult professional investment advisers before making any investment decision.