Goals and Questions

Posted by Mike H on 9 August 2016 | Comments

Questions

A. Do you adjust your income goals to maintain your risk profile goals?

or

B. Do you increase your risk exposure to maintain your income goals?

The reason I ask this is that the current surge in equity markets (despite falling company profits) appears to be due to increases in dividend rich stock prices. This follows collapsing bond returns. This suggests that a substantial number of investors are doing the latter.

This strategy can actually produce a double whammy if they don’t do their sums first.

Not only are they, by buying equities, raising their risk exposure, they are also gambling on future interest rates remaining low for a prolonged period.

A simplified example:

You buy an equity where the price to earnings ratio has already increased from 15:1 to 20:1 due to this buying activity.

This increases your investment returns from 2.5%( term deposit) to 5 %. (dividend)

 For this decision to make sense you have to truly believe there will be !0 years of record low interest rates. i.e. the time needed to break even before interest rates increase and the PE ratio falls back to its usual 15.

Yet Another Question

Is it time to review our investment plan?

It is usually recommended that financial plans be formally reviewed whenever there is a significant change in one’s life or financial circumstances.

However, this time it is the world’s financial circumstances that seems to have significantly changed.

Interest rates are approaching zero or less! Bonds now are now regarded as risky! Yesterday’s solutions have become today’s problems.

This may be a pivotal time to ensure our investment plan still protects our risk exposure goals (even if that means lowering our income goals.)

Regards

Mike H

"The views expressed here are the views of individual contributors and in no way should be construed to represent of the AIA, the Board, employees or volunteers. The AIA does not provide advice or recommend products or strategies. Readers should obtain professional advice before acting on any information provided in this Blog".

PS

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