Investing High, Investing Right
Before this current lockdown I had a beautiful and relaxing holiday up north. Being an early riser and added to the fact that our next-door neighbors had a bird sanctuary, it wasn’t uncommon that I heard a rooster crowing when I went outside for shacharit, my morning prayers. One evening when I was outside saying maariv, the evening prayers, I heard that same rooster and found it fascinating that it was seemingly contradicting ‘rooster studies 101’ – I thought that they are supposed to start crowing just before dawn, not at the beginning of the night!
Then I thought, ‘that’s what happens to us sometimes; we do the right action but at the wrong time, and the results are the opposite of our intentions’. Seeing as my area of expertise is finance, I automatically transferred the thought to investments.
Short term vs long term
Everyone’s financial situation is unique to them. However, within that uniqueness are several common denominators for most people. We all need savings that can help in the event of emergencies and for our retirement needs when we expect less income to be produced. Savings plans need to be set up to ensure that we have enough time to allow our money to grow, as the nominal amount of savings that most of us put away, before profits earned, is not sufficient to meet our future needs.
The Israeli government has mandated that all employees and employers (and even the self-employed) contribute a percentage of their salary towards long term pension savings and in many cases also into keren hishtalmut policies. The total invested is generally between 20% to 30% of one’s salary! Retirement policies are earmarked for long term while kranot hishtalmut can be accessed after 6 years, although they can also be saved for long term needs.
The potential conflict comes when a person’s more conservative instinct dictates their long-term investment plan. If you know you need your savings in the short-term then you are correct to be conservative. However, if your investments are for the longer term you need to consider investing more aggressively to achieve the returns you want. Unfortunately, the majority of assets managed by pension funds are blindly invested in conservative default strategies with approximately 30% exposure to stocks on average.
Most retirement funds in Israel are invested much more conservatively than, for example, in the USA. Possibly three quarters of all assets in Israel are invested in the maslul klali, which is a conservative track. In comparison, in the USA, the average person seeking long-term investment will be looking at 80%-100% equity or stock exposure.
For short term savings plans of 2-5 years, that lower stock exposure makes sense. But for longer term investing, where you have time to ride the ups and downs of the market, a higher percentage of stocks in your portfolio has traditionally proven to make a major difference in long-term returns.
For example, if you are earning a monthly salary of 15,000 nis and 30% of it is being contributing to your retirement and keren hishtalmut funds – 4500nis a month – and you earn a conservative 4% annual rate of return, your savings will grow to approximately 3.1 million nis over 30 years. But if you increase the risk level and achieve a 7% rate of return (never guaranteed but highly attainable over the long run) your retirement savings grow to 5.5 million, or 77% more in total!
Breakdown your investment requirements
Those who are 20, 30 and 40 years from retirement need to be raising their stock exposure to maximize their long-term savings in order to fund their retirements. That means looking at higher risk options with more volatility but generally much higher returns. Obviously, you need to review your investment plan regularly, and particularly if your financial situation changes in a way that will impact it. However, all things being equal if you have constructed an investment portfolio that meets your needs and timeline, you need to be confident that you can ride out any financial volatility and continue to increase your savings in line with your long-term requirements.
Even as you approach retirement avoid the knee jerk reaction to move all your investments to low risk. Yes, you will be needing your savings in the nearer future but look at your whole picture before making any move.
Your pension will likely become an annuity at some point, so that element of your investments definitely needs to be moved into a more conservative investment fund as you approach retirement, with possibly less than 30% held in stocks.
However, if you have, for example, a keren hishtalmut that you aren’t planning on touching, it can be left in a higher risk category. It is crucial that you examine all components of your investment portfolio and decide which elements should be in higher risk plans, and which you will need in the more immediate future.
A well-structured investment portfolio is crucial in order to maximize your money over time, so it is there when you need it. In the end, I discovered that roosters crow at night to warn about potential danger. While I’m not claiming to be able to warn you about all impending danger, consider yourself warned regarding this long-term investing pitfall.
Important information re Israeli government stimuli
Did you receive the latest stimulus?
If you aren’t sure if you received the amount you are entitled to, follow the link https://forms.btl.gov.il/Form/DStart/StatusBankAccount to find out the status. If bituach leumi doesn’t have your correct bank account details your allowance might be waiting in the post office for you to collect it. If that’s the case and you prefer not to pick it up you can provide your bank details and the money will be in your account in November.
Additional grant for the Chagim for those with negative income tax
Check if you fit the criteria and are eligible for this means-tested grant by following this link
BeHatzlacha and wishing everyone a truly sweet, healthy and financially successful new year!