For people who are in retirement or retirement, the standard investment advice has long been to gradually unload stocks and take care of obligations as you get older. The idea is to reduce the downside risk of the stock market in order to eliminate much of your portfolio when you need the money the most.
But in the era of ultra-light bond yields and longer retirements, should conventional wisdom be seriously challenged? Perhaps there is a greater risk, after all, that you will survive your savings and that even a low rate of inflation will erode the value of your investments over time if they do not progress with the economy, economy.
Chris Brightman, director of investments at Research Affiliates, wrote in a recent report: “These negative real interest rates paid by a growing proportion of developed world governments on their debt will not retain our long-term buying power, Not to mention generating the actual wealth growth needed to achieve our investment goals. ”
Volatility also prompts retired investors to do the wrong thing at the wrong time. According to new research conducted by Fidelity Investments, “long-term investors tend to reduce their equity investments in the course of significant short-term stock market declines, rather than adhering to a Long-term thinking. ”
Most investors do not make portfolio projections for several decades, of course, but consider that many people will spend 30 or more years in retirement. A long-term perspective is essential.
Inflation takes its share
A typical stock portfolio could earn 7 percent on average, compared to the 1.55 percent return of a long-term loan these days. Bonds are generally considered to be less risky than equities because they are less volatile, but those investing in the longer term face the greatest challenge of surpassing the rising cost of living. When inflation is taken into account, inventory gains are more modest, but bonds lose value.
Sarah Newcomb, a behavioral economist for Morningstar, wanted to know for herself how much the cost of living would increase over time and whether her portfolio could keep pace with inflation.
“I’ve learned that with an average inflation rate of 3 percent, prices double every 24 years,” said Newcomb, who is also the author of “Loaded: Money, Psychology and How to Get Ahead Without Doing Your Values Behind “(Wiley, 2016).
“This means that as I retire, my life will cost twice as much as it is now, and if I reach the end of the 80s, the same way of life will cost four times as much as it does today, Mrs. Newcomb added. “If I do not actively rescue and actively invest, the real risk is the risk of not withdrawing at all.”
It is natural to wander from the side of caution when investing for retirement. After all, remembering the enormous liquidation in 2008 and facing the recent volatility of the so-called Brexit vote makes anxious millions of investors. Yet they can easily take too much risk and become myopic on the erosion of inflation. Attending in cash or holding long-term bonds is not the answer to this perpetual problem.
“A counselor recently told me about a client who was left with tens of millions of dollars after the death of her husband,” Newcomb said. “This woman is terrified of abusing her money, so she refuses to invest. The decision to keep money” safe “in cash and cash equivalents guarantees a financial loss in the form of inflation.
In addition to the general increase in the cost of living, older Americans are faced with the probability that they will ultimately have to pay some form of long-term care. Seventy percent of Americans over the age of 65 will require nursing, home care or home care services, according to the Department of Health and Social Services.
Like many health care costs, the cost of long-term care increases faster than the rate of consumer inflation. Expenditures for a private nursing home, for example, rose at a rate of 3.5 per cent from 2011 to 2015, according to Genworth, an insurance company, compared to a current inflation rate of just over Of 1 per cent. The median cost of a private room is now close to $ 100,000 a year.
“I am very concerned about the risk of long-term care”, exp