What? Are we invested in the capital market? Yes. The pension savings money that savers deposit is invested in the capital market so that the amount available to the saver at retirement will increase.
The pension savings money that savers deposit is invested in the capital market so that the amount available to the saver at retirement will increase.
How does it work?
For investment in the capital market, the saver receives a return – that is, a certain interest on the amount invested. Since savings are very long-term, return has a significant component in savings.
What’s the challenge?
Return is obtained for risk of funds. The higher the risk, the higher the return the saver may receive, but can also lose the money.
So how do you do it right?
1. The savings are invested in a wide range of securities and investment channels. From very solid securities (such as short term Israeli government bonds) to riskier securities (such as stocks or hedge fund investments). Pension funds invest up to 30% in bonds issued by the State of Israel at a guaranteed yield of 4%. The remaining 70% is invested in the capital market.
2. Each saver determines the mix that suits him in investing his savings funds. Each pension fund, provident fund and managers’ insurance (which are the instruments by which pension savings are managed) has different investment tracks. Some of them are solid tracks, in which the investment is only in low-risk securities that will lead to a low return, and others are risky tracks in which a larger percentage of the money is invested in risky securities, and the yield is higher, but the risk of losing the money is also higher.
3. If the saver does not choose an investment track, he is attached to a general track. This track includes an investment of about 30% in equities and about 25% in corporate bonds (bonds issued by commercial companies). The general route is not suitable for everyone.
4. The capital market is conducted in cycles, there will be ups and downs and ups and downs again, but the trend is – up. Since savings are managed over decades, even if there is a period of declines, then it will be compensated during a period of increases. The cycle of ups and downs is called volatility.
When does volatility start to get dangerous? When approaching retirement age. So, if there is a period of declines at the end of which the saver retires, he will not benefit from the period of increases that follows, so that you will recoup the loss. Therefore, as you approach retirement age, it is worthwhile to reduce the risk in your portfolio in order to avoid the volatility of investment in the capital market.
5. Return is a very important component of saving – therefore, when young, it is worthwhile to have a high level of exposure to the market, and retirement is approaching, it is worthwhile to reduce exposure to the market.
Applause:
When deciding between several pension savings instruments, yield is a very important parameter. However, since savings are long-term, so should we look at returns:
1. The return in a given month has no significance in pension savings. An entity that achieved a high return in a certain month may have “gambled” on a certain investment, and the bet worked. It’s harder to succeed in the long run.
2. In pension instruments, the important return is a long-term return. A year, three years, or even five years – to see if managers know how to manage well during both booms and downturns.
3. You don’t have to choose the fund or fund that is at the top of the returns table – you can’t continuously be in first place, without taking an unusual risk. Try to manage savings in funds or funds that are in the top third of the table of returns over time – 3 or 5 years.
4. How do you know if the fund or fund is in the top third? Ask your advisor or pension agent to upload on the Ministry of Finance website (Gamal-Net, Pension-Net and Insurance-Net) the type of funds in which you are interested in investing, and check returns over a period of 3 and 5 years. Be sure that the agent or consultant shows the table of the treasury, and not another table, which can be manipulated.
5. If your chosen fund lags within one year and has made a below-average return, ask your agent or advisor for an explanation of the low returns and stay tuned. If this trend continues, you should consider replacing the pension savings instrument.
6. You should avoid choosing a cash register or fund based on advice from friends, workplace advice, or advice from someone who knows someone who recommends the fund who has heard that it has performed well.
Economic crisis:
In a period of economic crisis, returns on funds and pension funds are negative, that is, savers lose money. If the saver follows the savings, and reduces the level of risk as he approaches retirement age, he will arrive at the crisis prepared and will not suffer damage. Young savers can absorb damage, because over time, the market will rise and they will compensate for the damage.
Savers who in times of crisis find it difficult to cope with the loss in pension funds and provident funds can choose to transfer their savings to a solid track. However, here we must pay attention to a potentially critical point: it is difficult to time the market. Usually, the transition to the solid track is made after the saver has already suffered a loss. Then, when the market starts to rise, the saver does not enjoy the increase, and he returns to his previous path too late, thus fixing the loss. There are also savers who forget to return to the previous track over long periods, and in fact do not accumulate a return on savings.
In fact, the best way to deal with a crisis in the capital market in managing pension savings is to come to it prepared, that is, to ensure an ongoing adjustment of the level of risk in savings, to the period of time remaining for the saver until his retirement.
