“Help! My Parents’ Retirement Portfolio is down 40%!”
Last week I received the following email from a concerned subscriber to my premium newsletter service, The Churchouse Letter, and I’d like to share it with readers of my free newsletter, Peter’s Perspective because it’s a situation we can all learn from:
“A few years ago my parents put almost 90% of their savings in stocks and mutual funds, when the Hang Seng Index was 30,000, and 10% in RMB (I was too young to know about stocks). Since they never sold, they’ve lost 40%, excluding dividends. They do have two tiny properties, but they retire this year and receive retirement funds. What should they do?”
I wish we didn’t get emails like this from our subscribers. But we do. Far more often than I’d like.
I firstly want to thank this young reader for taking the time to write in to us.
We don’t have many young subscribers to The Churchouse Letter. I wish we had more.
Because the value of learning the basics of investing (much of which I’ll cover in this essay) could be worth millions to a younger investor over the course of a lifetime.
I have always wondered why on earth the basic skills of investing are not covered in educational curriculums. We teach mathematics… language… history… geography… how the earth was made… social sciences…
But the basic life skills we need, how insurance works… taxes… how to manage your finances… how to invest. These are completely ignored by the education system.
Yes as parents, we have a duty to educate our children. But if the parents don’t even know the basics, then how can they teach their children?
Imagine how much wealthier the world might be if these simple lessons were taught.
I say this, because this short message from our subscriber is actually a treasure-trove of valuable lessons.
Our reader learns these lessons, unfortunately at the expense of the parents, and where they went wrong…
Let me explain.
The Hang Seng was last at 30,000 in right at the top of the 2007 bubble. With just 8 years to go until retirement, they put 90% of their investment portfolio into the riskiest part of the asset spectrum… equities.
Truth be told, there’s no exact science on just what that percentage should have been. But rest assured, it’s not 90%. It’s closer to 15-30%.
In a world of ETF’s that cost next to nothing, mutual funds are simply a death sentence to your investment return. For the life of me, I cannot understand why anyone on God’s green earth still buys them in this day and age.
The fees make the extortionate international roaming charges on your mobile phone look like value for money!
We pulled up a simple ‘Asia Equity Dividend Fund’ from HSBC’s local offering here in Hong Kong.
It’s a simple equity fund that, as you might have guessed, holds a basket of Asian dividend-paying equities.
An ‘Initial Charge’ of 5%. And thereafter, an annual management fee of 1.5%.
It costs you 5% of your money just to buy this fund? And then you pay another 1.5% per annum.
And on top of that, they quote the bid/offer spread as 5%! FIVE PERCENT!
Words fail me…
Now, I can’t be 100% sure because I didn’t pry, but I’ll bet my bottom dollar that the 90% equity allocation was very heavily skewed towards Hong Kong.
Why? Classic ‘home bias’… investors have a huge tendency overweight (or even ‘only-weight’) their investment allocations into their domestic markets.
I understand the rationale. People invest in what they are familiar. And there is often a tendency to assume that the stock market will reflect economic conditions. That’s just not the case. Look at Hong Kong, the place has been booming for the past few years, yet, recent China bubble and burst aside, the stock market has done nothing.
Conversely, U.S. growth has been sluggish over the past few years, wages are inching upwards, inflation is low… but the stock market has gone gangbusters.
You MUST be prepared to take some global diversification in your equity portfolio.
“We already know this Peter!” I hear you say.
We go about this simple risk technique ad nauseam, but here’s another live example of what happens when stops are not adhered to.
We’ve covered this repeatedly, most recently in “An Ounce of Prevention”. If you haven’t read it, please do so.
Again, I don’t have the specifics (because we cannot provide individual financial advice), but I’m confident this 40% loss our reader describes could have been a LOT lower if stops have been used.
Joseph C., New Zealand
But there’s also one more lesson in this readers email to us.
But this time I’m thrilled to say it’s a tremendously positive one. Read the email again…
“They do have two tiny properties…”
Hallelujah! They own some Investment Real Estate! And it doesn’t matter that it’s “tiny” (ahem… all property in Hong Kong is tiny!).
What DOES matter is that they are sitting on capital gains (Hong Kong’s property market is at an all-time high).
And I also imagine it is spinning them off some monthly income.
This couple have some perfect retirement assets.
My readers know how hard I pound the table on investment real estate so I won’t go into it all over again… just read my short piece “You Choose. Proper(ty) Profits of an Auto Wreck.”.
The reader’s final question “What should they do?” is one that unfortunately I cannot address directly. We cannot provide individual financial advice.
The only thing I can say is this: focus on your future risk, not your past losses.
Let me explain.
If you’re down 40% on an investment, you have 2 choices:
- Hope it goes back up and you recoup some of your losses.
- Cut your losses.
For this couple, their retirement portfolio is down 40%. That hurts.
But if they just “sit tight” then they are not doing anything different whatsoever… they’re not reducing their future risk because this equity portfolio could fall another 20%… or 50%!
Being overly concentrated in equities at their stage in life is a problem. So fix the problem!
Don’t let painful loss turn into catastrophic one!
If on the other hand, they restructure (yes, that means cutting losses), diversify, and focus on their risk going forwards, then I believe they’ll sleep better at night.
Ales G., China
P.S. One thing I did suggest to our subscriber was to take another look at an existing ETF that we recommended a few months ago.
We originally recommended it in our July edition of The Churchouse Letter as a way of maximising our equity upside whilst minimising our downside.
So far it has outperformed it’s benchmark S&P 500 by 4.1% is just 3 months… It’s max drawdown (i.e. peak to trough) has been 2% less… and it’s done all of this with less volatility.
Reduced Downside. Outperformance. Lower Volatility.
And it remains a BUY.