Business

Saturday September 12, 2009

Investing tips for over 50s

By TEE LIN SAY


WITH life expectancy increasing, interest rates at an all time low and inflation inching up, to rely purely on one’s Employees Provident Fund would be almost foolhardy.

One of the ways to fight inflation is to invest in equity markets. But would an investor above 50 be financially healthier with a large equities allocation or a melange of bonds and fixed deposits?

According to the Centre for Retirement Research at Boston College, between 1883 and 2008, the stock market averaged a 7.6% return after inflation. This performance has encouraged fund managers to advice older investors to invest up to 50% of their wealth in equities — AP

Between January and October last year, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) lost 45.3% of its value. An investor with RM1mil exposure to a FBM KLCI fund would have lost some RM450,000 in the span of 10 months. Its not all doom though.

In the five months since hitting the bottom of 838.39 in March 12, the FBM KLCI has rebounded 44%. So, investors still roughly need another 20% to break even (assuming investors bought when the FBM KLCI reached its peak of 1,516 on Jan 11, 2008).

Younger investors may feel immense blows to their egos when losing wealth, but this doesn’t compare to the fear of a 50 year old who is nearing retirement.

Young investors have time to weather downturns in the market as they are further away from retirement. A senior citizen, however, will have limited time in recouping losses. Thus, having the right asset allocation mix is important.

Over the longer term, stock markets do provide attractive returns to investors.

According to the Centre for Retirement Research at Boston College, between 1883 and 2008, the stock market averaged a 7.6% return after inflation.

This performance has encouraged fund managers to advice older investors to invest up to 50% of their wealth in equities.

“The stock market gives you better returns, although it’s slightly riskier. As long as you go for a company with a good track record and hold for the mid term, you’ll do fine,” says a 59-year-old retiree who has been investing over the last 20 years.

Using the FBM KLCI as a benchmark, over a 10 year period up to Sept 10, the average compounded returns is 8% per annum. Bond funds, however, averaged returns of 5%.

Over time, the difference in returns can make a big difference to one’s retirement fund.

If investors choose to put their money in fixed deposits, it is likely that the returns will not exceed inflation by very much.

However, equities have the potential to produce returns that can beat inflation by a wide margin, even after acounting for taxes.

“Equities are a more liquid form of asset class than, say, properties. However, at a more senior age where retirement concerns prevail, a signicantly reduced risk appetite reflects a more careful and conservative approach to investing in equities,” says private equity banker Sherilyn Foong.

Key considerations in equity allocation includes risk tolerance, time horizon and financial goals. Foong adds that market cycles are getting increasingly shorter and more sophisticated.

“As such, there will always be opportunities in any market situation. Today, 50 is not really considered over the hill. With today’s increasing life span, there is definitely time to go through a few more cycles,” she says.

She suggests stocks that are defensive, fundamentally strong, consistent and those with dividend plays.

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