Home' Trinidad and Tobago Guardian : January 31st 2016 Contents JANUARY 31 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
STOCKS | SBG13
"They are just plugging away through
the ups and downs of the stock market,"
said Sarah Holden, director of retirement
and investor research at the Investment
Company Institute, an association of reg-
It can be nerve-wracking to see retire-
ment balances plunge with the market,
conjuring fears of spending the golden
years in a cardboard box. Retirement
account administrators say they see a
sharp uptick in phone calls when the mar-
ket stumbles, and this downturn has been
But then, sensibly, they don t do much,
says John Sweeney, executive vice president
of investing strategies at Fidelity, one the
largest administrators of 401(k) accounts.
Retirement savers have come to under-
stand that they need to think long term.
Many lived through the far more unsettling
years of the financial crisis, then saw the
market get back to its earlier peak in about
five years. That sure felt like a long time
then, but even those who retire this week
can reasonably expect to live another 20
years, long enough for the riskiest parts
of any saver s portfolio to recover.
"They aren t really worried about timing
the market but having time in the market,"
Vanguard, which oversees US$3 trillion
in assets, says that while the S&P 500
sank eight per cent during the first 11 days
of the year there was no perceptible change
in participant trading compared with the
same period in the past two years.
"There are a few that panic and they
are harming themselves when they choose
to sell equities at a low," said Jean Young,
a senior research analyst with the Vanguard
Center for Retirement Research. "But by
and large we aren t seeing a lot of activ-
And this is while retirement savers at
nearly every age group are putting more
of their nest egg into stocks, as advisers
Vanguard says every age group under
60 has increased the portion of their
investments allocated to equities between
2007, the pre-crash peak, and 2014. The
change was most dramatic for people
under 25, who now have 87 per cent of
their portfolios in stocks, up from 67 per
cent in 2007. The figures for 2015 are not
complete but Vanguard expects the trend
The median allocation for equities across
all age groups is 83 per cent, up from 80
per cent in 2007.
So where s all this cool-headed confi-
dence amid the chaos coming from? As
much from automation as from steely
nerves or deep wisdom.
Funds based on an investor s expected
retirement date and other professionally
managed products that allow investors to
go on autopilot have become much more
popular in recent years. These don t require
the investor to make as many judgment
calls, leaving it up to professionals to adjust
the risk based on when the investor plans
to quit the daily grind and buy a Win-
Vanguard said about 48 per cent of its
plan participants are in a professionally
managed product, up from less than 20
per cent in 2007. This has helped greatly
reduce the number of people with extreme
positions, such as holding all equities or
no equities at all.
Also, employers have increasingly been
enrolling employees automatically, and
increasing the number of participants.
That leaves many investors unaware of
exactly how much they hold in stocks, or
unconcerned. Some are simply more con-
fident in the concept that equities are
And even in a bad stock market, people
tend to continue to contribute to their
retirement plan. That helps them buy
stocks at lower prices, setting them up
for bigger gains later. That s how those
with long time horizons weathered the
recession without much bruising; and it
should help today s hands-off investors
"People didn t know what to do, so
they didn t do anything, which worked
to their advantage," Young said.AP
Investors stay steady on retirement savings
Panic is passé
FILE: In this Monday, August 24, 2015, file photo, pedestrians walk past the New York Stock Exchange. Despite massive swings in
the stock market of late, it appears many US investors are playing it cool when it comes to their retirement savings. They have
survived worse and now they are saving more. And plan administrators say many investors are leaving their holdings untouched or
are making modest adjustments for the better.
Over the last several years, investors have been forced
by the Federal Reserve s policy to take on more risk to
obtain yield on their investments.
As yields on CDs declined from the 5.0 to 6.0 per cent
range in 2008 to a little more than zero, investors have
purchased lower quality and riskier investments in an
effort to maintain income. Also, the credit markets have
been stable since 2008, which has led to a state of com-
placency. Investors need to pay attention to what is hap-
pening with credit markets today, especially in the high-
yield bond space.
The decline in commodity prices is pushing some high-
yield bonds toward default. The pressure on the energy
and metals and mining sectors does not appear that it
will be relieved in the near term. Energy and metals and
mining issues make up a sizable percentage of high-yield
Accordingly, high-yield funds had a negative return
for 2015, but things could get much worse. Investors see
the yields coming from these funds as attractive, being
in the range of 7.0 to 8.0 percent.
The yield looks attractive, but what isn t apparent is
that this market has become bifurcated. Yields on energy
and commodity companies have expanded to the 12 per-
cent range; the remainder of the market is in the 5.5
percent range. The 12 per cent yield indicates a high
expectation of commodity and energy companies default-
ing. Standard and Poor s downgraded more than US$1
trillion of bonds last year and the pace appears to be
On the surface, investors would naturally be attracted
to a yield of 8.0 per cent; however, they could be in for
a rude awakening if financial stress in the energy area
gets worse; many of those companies could default,
leaving investors with a large loss.
As of June 30, more than 80 per cent of these com-
panies cash flow was going to service their outstanding
debt; this leaves little cash to fund operations. During
this time, oil was still trading well above US$50 per barrel.
The situation has only gotten worse, with oil now trading
in the US$30s.
To add to the challenges, many high-yield bonds are
not liquid. Individual investors likely own high-yield
bonds through an ETF or an open-ended mutual fund.
The general belief is that if they choose to sell they can
easily do so, which is correct.
However, what is not usually obvious is what can
happen to the price of a fund in an environment where
people become fearful. If concern about the credit cycle
gets worse and investors start selling their funds in large
volume, the prices of the bonds underlying the funds
can drop significantly, even without defaults. As fund
investors sell, the fund s manager is forced to raise cash
to pay out the redemption, and the manager has to sell
part of the fund s holdings.
The corporate bond market is made up of thousands
of different issues, many of which do not trade on a
regular basis. When the fund manager is forced to sell,
he/she needs to find a buyer. In a time of high-selling
pressure, buyers tend to offer low-ball bids, or no bids
Remember, the fund s manager has to sell, practically
at any price, to meet the redemption request. The liquidity
issue may be a larger risk to high-yield bonds than the
One thing is very clear: Energy and mining companies
are facing ongoing and increasing headwinds. There is
good reason the yields on energy and mining bonds has
shot up so much, given the trouble they face. If investors
own high-yield funds, they need to understand the expo-
sure their funds have to these sectors; and to the risk of
defaulting bonds or large redemptions by other holders.
to watch for in
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