The Perils of Indexation

In Investments on 25/12/2009 at 9:34 am

This writer believes that indexation is the way to go when investing in equities.

But I think  this is going too far: “What can retirees do? They have to invest in equities to earn a higher return. Although equities have a higher level of risk, it can be mitigated by investing in a low cost fund, such as an exchange traded fund. The return on equities is likely to be around 5% to 7%, which is much better than 2% on government bonds.”

Err what about the principal? Remember oldies may need their capital sums in a hurry.

The return of the Dow to 10,000 (10520 on X’mas eve) serves as a sad reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.

Likewise the STI. The STI started 2000 at around 2000. Went to a high of just below 4000 and on 24 Dec was at 2837 Just in March 2009, it was at  1455.

Fine if you are a young person with an investment horizon of 30-40 years, and a plan to regularly rebalance your portfolio, so as to take $ (or add $) to yr equity index funds.

But not if you are a retiree or someone 60 going on 70, when your investment horizons are shorter.  Especially if you have not invested in shares when younger: the volatility may weaken yr heart or demotalise you.

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