Dubai: Conventional investing wisdom says that as people age, they should put less of their money in stocks and more into stable investments such as bonds and cash. This is sound advice based on the idea that in retirement you want to protect your assets in case there is a major market downturn.
But there are still strong arguments to continue investing in stocks even as you get older. Few people recommend an all-stock portfolio, but reducing stock ownership down to zero doesn't make sense, either.
Consider that many mutual funds geared toward older investors still comprise hefty doses of stocks. On average, studies show that prominent global mutual funds are made up of 70 per cent stocks for retirees at age 65, and is still made up of 25 per cent stocks when that same retiree is past 90 years of age.
Why does owning stocks make sense even for older investors? Let's examine these 6 potential factors we often forget to factor in:
We often forget to factor in #1: Life expectancy goes longer nowadays
If you are thinking about retirement as you approach age 60, it's important to recognise that you still may have several decades of life remaining. People are routinely living into their 80s these days.
Do you have enough savings to last 40 years or more? While it's important to protect the assets you have, you may find that higher returns from stocks will be needed in order to accrue the money you need.
We often forget to factor in #2: 4 of every 10 people start saving late
If you started investing early and contributed regularly to your retirement accounts over the course of several decades, you may be able to take a conservative investing approach in retirement.
But if you began investing late, your portfolio may not have had time to grow enough to fund a comfortable retirement.
Continuing to invest in stocks will allow you to expand your savings and reach your target figure. It still makes sense to balance your stocks with more conservative investments, but taking on a little bit more risk in exchange for potentially higher returns may be worth it.
We often forget to factor in #3: Other investments don't yield as much as they used to
Moving away from stocks was good advice for older people back when you could get better returns on bonds and bank interest. The government treasury bond yields right now average at about 1-2 per cent.
That's less than half of what it was a decade ago and less than a third of the rate from 1990. Interest from cash in the bank or certificates of deposit will generate a measly 1 per cent or less.
The bottom line is that these returns will barely outpace the rate of inflation and won't bring you much in the way of useful income.
We often forget to factor in #4: Some stocks are safer than others
Not all stocks move up and down in the same way. While stocks are generally more volatile than bonds and cash, there are many that have a strong track record of steady returns and relative immunity from market crashes.
Take a look at mutual funds comprised of large-cap companies with diversified revenue streams. Consider dividend-producing stocks that don't move much in terms of share price, but can generate income.
To find these investments, search for those that lost less than average during the Great Recession and have a history of low volatility.
We often forget to factor in #5: Dividend stocks can bring you income
Dividend stocks are not only more stable than many other stock investments, but also they can generate cash flow at a time when you're not bringing in other income.
A good dividend stock can produce a yield of more than 4 per cent, which is more than what you'll get from many other non-stock investments right now. This will help ensure the growth of your portfolio is at least outpacing inflation.
If you are unsure about which dividend stocks to buy, take a look at a well-rated dividend mutual fund. On average, prominent global mutual funds, for example, has a three-year total return of more than 10 per cent, outpacing key benchmark indices that track them.
Its overall returns also dropped less than the key benchmark indices globally during the Great Recession.
We often forget to factor in #6: Busts are often followed by bigger booms
A person who retired 10 years ago would have stopped working right when the market crashed, and there's a good chance they may have lost a significant chunk of their savings. That's bad.
But it's important to note that in the decade since, the key stock market benchmarks have gone up every year at an average of more than 8.5 per cent annually.
In other words, someone who lost a lot from the crash of 2007–2008 will have gotten all of their money back and much more if they stayed invested in stocks.
This is not to suggest that older investors should be unreasonably aggressive, but they should be aware that a single bad year or two probably won't completely wipe you out financially.
If your retirement is long, you may see some market busts, but you'll also see some long stretches of good returns.
Key takeaway?
When people are retired, studies show that although they are supposed to be done with helping out their kids financially, it seems that those older are continuing to lend a hand to their children even as they grow into adulthood.
A recent global survey said that millennial parents between the ages of 19 and 37 receive an average of more than $10,000 (Dh36,700) annually in the form of money or unpaid child care from their parents.
With these additional costs on the horizon, those approaching retirement age may still want to invest in stocks to build their nest egg further.
Investors of all ages experience blood-pressure spikes when the market gyrates, as it has done a few times lately. But veteran market investors remind that now’s not the time to ratchet back your exposure to stocks.
You’ve got years — decades, even, if you’re in good health and have a family history of longevity — to ride out the stock market’s ups and downs, market experts add. Consider that global fund manager Vanguard has 78 per cent of assets in its 2035 target-date retirement fund invested in stocks, with the remaining 22 per cent in bonds - that speaks volumes in itself, doesn’t it?
