# Should pensioners invest in equities



## Lark (1 Feb 2004)

Hi Brendan,

I'm a bit surprised at your advice(in another thread) that pensioners should stay invested in equities. I agree that deposits are guaranteed to lose you money (because of inflation) and that equities are the best long-term bet. 

But if I'm in my 70s can I afford a long-term view? Anyone watching Prime Time last night will know that most of our savings will probably go to a nursing home. Do you really want to cash in an equity-based investment at the bottom of the market to pay for full-time care? 

When you're in your 70s you've got to play it safe. You've got to sacrifice returns to avoid volatility.


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## Brendan Burgess (1 Feb 2004)

Hi Lark

I suppose you have to look at each case on its merits. But, a pensioner should invest in equities, unless there is a good reason not to. I will deal with the financial logic only. The emotional issues would have to be taken into consideration. 

Take a 65 year old couple with €50k cash and no other assets. They have a pension which needs to be supplemented to some extent. Either or both could easily live another 30 years, so we are talking long term. They should be invested in equities. 

You will argue that they might suddenly need cash for medical expenses or nursing home care. So what? They can sell part of their shares. 

You will argue that the stock market may be at a low just when they need the cash. So what? They will be realising their shares over a period of time at highs and lows. 

You may argue that they will run out of cash sooner if the stockmarket falls. That’s true, but it will last longer if the stockmarket rises. They will be better off most of the time if they invest in the stockmarket. 

The argument is even stronger for a 65 year old couple with €50k in cash and a home worth €500k. They should definitely be in the stockmarket. When their cash runs out, they can release equity in their home. If they invest in the stockmarket, they can expect that this will be later than if they leave it on deposit. 

What about a 90 year old who has €1m and expects to live only another 5 years? They are really investing their money on behalf of their beneficiaries. They should invest their money wherever is best for the beneficiaries, which is usually the stockmarket. By the way, they should invest directly in shares instead of unit linked funds, as any gains on disposal on death will be exempt from CGT. 

The exception is the person who has only 5 years to live who has just enough money to pay for the nursing home for the 5 years. Say the nursing home costs €30k per year and they have €150k and they are unlikely to live much more than 5 years. There is no advantage to this person investing in the stockmarket. If their investments double, they can’t get any benefit from it. They are only going to live 5 years anyway. However, if their investments halve, they will run out of cash before they die. They should stay in cash. Alternatively, they could do a deal with their beneficiaries. They will leave them whatever is left on condition that the beneficiary looks after them if they run out of cash. 

What happens if you have 20 years to live and only enough cash to pay for 5 years? That’s a tough one. If you leave it on deposit, you will definitely have enough cash to last 5 years, but you may die before you run out of cash. If you put it in the stockmarket, the risk reward ratio is favourable. You are more likely to get another year out of it, than to run out of money earlier. However, as you may die before the 5 years, you may be better off in cash. 

Brendan


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## daltonr (16 Feb 2004)

People dismiss the idea of Pensioners investing in shares as if all pensioners were the same, or for that matter as if all shares were the same.

There are growth stocks which are a little risky and might pay no dividends but are expected to grow rapidly.  But there are also Big Companies with high dividend yields that tend not to shoot up and down rapidly.

There seems to be a perception that deposits are 100% safe and equities are 100% risky.  And there's no in between.

-Rd


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## Trekker (17 Feb 2004)

*A bright idea!*



> "There seems to be a perception that deposits are 100% safe and equities are 100% risky. And there's no in between."


Why doesn't someone come up with a product which gives the safety of a deposit and yet some exposure to stockmarket growth?


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (17 Feb 2004)

*Re: A bright idea!*

You mean like a tracker bond? Ugh :x


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## Trekker (17 Feb 2004)

*Eureka*

O,do you mean this product already exists?


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## <A HREF=http://pub145.ezboard.com/baskaboutmoney.s (17 Feb 2004)

*Re: Eureka*

Tracker bonds offer full or partial (nominal) capital security and the chance (often hard to ascertain) to participate to some extent (ditto!) in equity growth. See this topic and the ones that it links to for more on tracker bonds:


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## darag (18 Feb 2004)

*Re: Eureka*

coming at the question from a gambling background,  there 
is an important factor gamblers consider called "risk of ruin".  
basically even when offered positive expected return (for 
example 2-1 on the toss of a coin), sometimes a gambler will 
turn down the wager because they are exposing themselves 
to the possibility of wiping out their bankroll.  with no wealth, 
you have destroyed your means of generating wealth.

take an elderly person who puts all their money into the
stockmarket.  the market takes a huge dive (loses 50%)
and simulataneously some unforseen health problem or
something arises which requires them to spend 50% of
their original fund. they have now wiped out their wealth
and it doesn't matter what happens the stockmarket 
subsequently.  it doesn't matter all that much that the
chance of this happening is small; the problem is that
the result is catastrophic.

the volatility of the stock market necessarily increases
the "risk of ruin" when combined with random demands
for cash.


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## Bedford (18 Feb 2004)

*Cop out*

Arguing that elderly people should invest in equities, without taking human desire into account, which is Brendan's line is a cop out. People are the most important thing - not money logic.

Sure, equities should appear strongly, but winning that argument at the price of allowing thugs in a salesforce to stuff elderly people with no experience or knowledge of investment risk with managed funds, shovelling their money from deposits to meet branch targets and support falling market share stats of its life subsidiary, is what happens in the real world.

Its about balance. A lot of retirees are heavily invested in property and shares and good on them - but the vast majority have only small pots of money most of which is on deposit. To target these people is immoral, but they have been so - thats the issue. So please lets not have a laboratory debate, somehow sanitised by the huge mis-selling scandel that's happened right under our noses. Lets call it as it is.


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## Brendan Burgess (19 Feb 2004)

*Re: Cop out*

Hi Bedford

I approach it in two ways. What's the best thing for a pensioner to do from a financial point of view. In many cases, investing in equities is clearly the best and letting it stagnate in a deposit account is clearly the worst. In some cases, equities will be wrong.

If the pensioner worries or cannot sleep because of the volatility, then equities are wrong. Let their money stagnate as long as they can sleep. 

You cannot ignore the human element. But you cannot just cop out by saying that they should only leave their cash on deposit, because it's difficult to explain to pensioners that they should invest in equities.

An advisor should do a financial review and fact find and explain why they recommend a particular product. If they recommend equities after comparing it to deposits, while pointing out the risks of *both*, then it's not misselling.

If they grab a granny out of the banking queue and put her money into the highest commission product which is clearly unsuitable, then IFSRA should remove that advisor from the industry and sanction their employer.

Brendan


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## Bedford (19 Feb 2004)

*Thanks*

Brendan that needed clarification by you, thanks.


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