Investment in the zero interest phase
Many prospective retirees consider the risk of loss with a classic equity, ETF or equity fund investment to be too incalculable and for this reason focus on apparently risk-free investments such as overnight money accounts, fixed-term deposit accounts, savings bonds or endowment insurance. In times of a sustained phase of zero interest rates, however, these common savings products are more likely to be yield killers than yield generators.
The overnight money account does not offer any inflation compensation
Since May 2018 at the latest, the inflation rate in Germany has been above or at the level of two percent. This means that consumer prices in Germany have increased by around two percent compared to the previous year. In order to achieve real growth or at least value retention with an investment, the return on investment must be at least as high as the rate of inflation. Since the tried and tested savings book or the daily and fixed-term deposit account do not even come close to paying such high credit interest, they are only conditionally suitable as a financial investment at the present time.
Longer life expectancy creates a new investment horizon
The lifespan of retirees has doubled since the 1960s. While people were able to enjoy their non-work life for around ten years back then, it is now an average of around 20 years. The longer life expectancy also increases the potential investment horizon of the individual investor. The probability of profit from investing in shares increases disproportionately with the duration of the investment, because of course loss periods must also be taken into account. Accordingly, prospective retirees should not categorically turn their backs on the stock market.
The equity quota must match the risk profile
What a perfect portfolio can look like in old age is an individual question that every investor has to answer for himself. However, if you have sleepless nights when the prices go diving and your wealth dwindles, you shouldn’t set your equity quota too high. On the other hand, if you want to turn the yield screw, you can still invest a third of your assets in stocks at an advanced age. How high the equity quota may be in each individual case always depends on the investor’s individual risk appetite.
Rule of thumb for risk-averse investors
Very conservative investors can of course base their investment decision on the rule of thumb “equity quota = 100 minus age”. This means that a 65-year-old retiree should invest a maximum of 35 percent of his assets in stocks. For a 78-year-old, for example, according to the formula, it would only be 22 percent. This strategy ensures a relatively high level of security in the depot, but it comes at the expense of the return.
Fund instead of individual stocks
Retirees, who find the selection of individual stocks too laborious and complicated, can easily invest in an inexpensive and well-diversified ETF, i.e. an exchange-traded index fund. If you prefer to rely on Riester and life insurance products, you can also increase the share of shares here.
One ETF for the whole world
When investing in an ETF, investors need to ensure that the fund is diversified across many regions and industries. With one ETF on the MSCI World and one on the MSCI Emerging Markets, you can already achieve optimal diversification. Investors who want to map the global equity universe in just one ETF and who focus on high-dividend companies can, for example, also buy an ETF on the FTSE All-World High Dividend Yield Index. This distributing ETF invests in around 1,300 companies with high dividend yields from industrialized and emerging countries.
The investments must be sufficiently diversified
So that the volatility of the portfolio can do justice to the risk appetite of a retired person, the portfolio should contain not only stocks but also fixed-income securities such as government and corporate bonds. A globally diversified portfolio of stocks and bonds minimizes the investor’s overall risk, as the non-correlated asset classes help to reduce the volatility of the overall portfolio to a minimum.
As with stocks, good risk diversification is also advisable for bonds. However, investors looking to invest in bonds through ETFs should invest their capital in several different funds in order to achieve maximum diversification. In the case of ETFs on government and corporate bonds, however, retirees should make sure that the credit ratings of the bonds match their personal risk profile. As everywhere in the financial world, the same applies to bonds: more returns, more risk.
Rental income instead of interest and dividends
In addition to fixed-income securities and stocks, real estate can also be of interest to senior citizens. For the purchase of a property, however, a much larger amount of capital must be made available than for an investment in company shares. However, a rented property offers a good opportunity for regular investment income. You have to weigh up for yourself whether you still want to bother with potentially difficult tenants in old age.
Pierre Bonnet / Forex-news.com.net
This text is for informational purposes only and does not represent an investment recommendation. Finanzen.net GmbH excludes any right of recourse.
Image Sources: Yuri Arcurs / Shutterstock.com, Monkey Business Images / Shutterstock.com