Investing prospects for the year ahead

The last four years have been tough for most investors as some long-held theories about safe investment rules were proven wrong. The hitherto relatively safe havens of stocks and bonds proved not to be so safe after all. So is the proverbial money-under-the-mattress strategy worth considering, or should we even be thinking of not saving at all?

Waiting to save for retirement when one reaches the mid-50s is far too late- John Cassar White

Between 2007 and the end of 2011 Germany’s DAX Index of prime shares lost more than 25 per cent in value while the FTSE 100 was down by 15 per cent. The Dow Jones industrial average was off by 14 per cent while the S&P 500 was lower by 20 per cent.

As for bonds, we all know how prices crashed in 2008 and the ongoing sovereign debt crisis has proven that there is no such thing as a risk-free asset. As long as the sovereign debt crisis in the eurozone persists we will continue to see volatility in both equity and bond prices – volatility that can destroy value for investors who depend on their investment capital and income to cope with an increasingly difficult economic situation.

Some financial service providers will no doubt try to exploit this gloomy situation by claiming that now is the time to look at alternative investments that for most small investors are as exotic as a dessert of prickly pears on a dinner party table in January. Our obsession with investment in property will persist despite some bitter experiences for many investors in property funds during 2011.Quite apart from the fact that many investors now realise that the price of property in Malta does fall, and often significantly so, this type of investment is highly illiquid. When one invests in property there is no annual dividend or a coupon, so you don’t receive any income until the asset is sold.

The star investment asset in 2011 was probably gold. Held for the long term gold is indeed a safe bet in a world that will sooner or later have to pay the price for printing money to resolve its insolvency problems by experiencing long bouts of inflation. However, investing in gold, antiques, art, vintage cars and rare spirits is not really an option for small investors.

So the best strategy to follow is the old adage of having a diversified portfolio. Very much depends, of course, on one’s age and particular circumstances. A young couple aiming to raise enough funds to make a deposit on their first home should stick to the boring bank accounts as capital safety is of paramount importance. But even here one needs to shop around for the best deals offered by banks that participate in the deposit guarantee scheme.

Those investors with less restrictive considerations in their savings strategy should look at investments in electronic trading funds that offer a diversified portfolio of equities and bonds. The usually reasonable initial fee and annual administration fee charged by fund managers on index linked funds are an important consideration when considering where to invest. The claims made by those selling tailor made funds managed by so called experts are usually proven wrong as these products often fail to perform as well as the indexes they aim to outperform.

One worrying development is that the Maltese seem to have lost their propensity to save. This may be a result of the tougher economic conditions that most families throughout Europe are facing in the last few years. For most other families investment is made almost exclusively in the family home that undoubtedly improves their quality of life, but offers little liquidity when people need to dip in their investment pool to meet current expenditure especially in old age. Using one’s home into a source of income is theoretically possible as banks offer equity release loans and annuities based on the security of one’s property.

However, this liquidity comes with a high economic price and, equally important, an emotional price as many find that charging their home in their old age is a very traumatic experience. Banks also need to be reasonable in the fees they charge for this kind of service as the risk premium being charged today is a disincentive for people to take up this option.

Finally, with the prospects of future pension income remaining bleak, people should start thinking about investing for the future sooner than seems to be the case at present. Waiting to save for retirement when one reaches the mid-50s is far too late.

jcassarwhite@yahoo.com