Podcast 3rd April 2015
The TV ad for Retirement Products show happy senior citizens enjoying their retired life. Insurance companies offer annuities for retirement. The NPS (National Pension Scheme) invests in a mix of debt and equity, depending on your age. Financial advisors advocate asset allocation based on age for Retirement Investments. Mutual funds offer retirement funds that invest in mix of debt and equity. The common assumption in all these products is that when you retire, the products would have generated the required returns that you need for your retirement.
The assumption that the world is normal is extremely naïve. Look around you in India and you find senior citizens reeling under the effects of inflation. 401 K investors in the US were handed out a huge whammy when the markets collapsed in 2008. Retirees at that time had no idea where they would find money to sustain them post retirement.
Rich economies are facing a severe lack of growth leading to huge unfunded pension liabilities. Economies are collapsing in other parts of the world due to factors such as high debt, low oil and commodity prices and civil unrest.
Clearly the World is not Normal. What does this mean for your Retirement Investments? Your Retirement Investments should take into account factors such as inflation, economic bubbles and busts, government policies, global macro economic factors, business cycles, consumer and socio economic trends, disruption and destruction in the business environment and health risks, not necessarily in that order.
Assuming that debt will generate real returns i.e. returns higher than inflation, equities will always be up especially when you retire, gold and real estate will protect you against inflation is too easy an assumption and bound to go wrong. Debt investments should factor in inflation expectations and when inflation expectations are rising, debt investments (debt for retirement is long term debt) are best avoided.
Equity investment should take into account market excesses (2000 tech bubble burst, 2008 global financial crisis are two examples) and changing business and economic trends. Listen to my Podcast on It’s a Destructive Business Cycle on investing on the basis of changing business and economic trends. There is no such investment as buy and forget it until retirement in equities.
Gold is a good investment when there is chaos in markets, otherwise it is a long term underperformer to other risk assets. Real estate investments should take into account rental yield, price to income ratio, economic cycles, local factors and other such yardsticks. Real estate investment made at the wrong time would result in prolonged debt servicing that would take its toll on one’s finances.
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