Saturday, March 21, 2009

Why Tempted SGDividends Are Not Investing into US Equities....

Aww man...we like Krafts and General Electric. Why? Do you know that Krafts are the brandowners of Oreo Cookies? Their financial ratios are not outstanding but they did a restructuring just 2-3 years ago which makes sense and we have the gut feeling that Irene B. Rosenfeld is a good leader.( we don't really like it that she is both chairman and CEO though...). How about General Electric?General Electric are beseiged by their GE Capital..but their other divisions are going damn strong. Just click on the links of key developments for GE under Reuters, compare with other companies you think are big and you will understand. But we are not investing in these, neither are we intending to do so( unless something interesting happens). Among many reasons such as the exchange rate risks, the lack of a homeground advantage as Singaporean investors, we just found another reason to not invest in US equities. (If you are trader, yeah think US market is for you...its damn volatile . Investing and Trading are different)

This reason is not new actually..think we read it in a book initially and it makes sense to us. It suggests that the US stock market will not be able to see as good a returns as the past due to the mandatory withdrawal of US citizens of their 401Ks at age 70.5years. Just in case, as a Singaporean and you are not familiar with 401Ks, its like a retirement account, similar to our Singapore Supplementary Retirement Scheme (SRS) which was incepted somewhere in year 2001. Below is a summary timeline of 401Ks..

Let's look at the current population pyramid of US as of year 2009. ( taken from their Censeus Bureaus....don't play play and who says Geography is useless, we will punch you..see how useful it is!)It should be noted that the inception of 401Ks was around year 1978. That means that as of current year 2009, about 31 years have passed, enough time for US citizens to have amassed a large amount of equities or mutual funds and other securities in their 401Ks. Add to that, as can be seen from the population pyramid above, the baby boombers are coming of age. At around 6-10 years time, the currently 60-64 age group would have to begin mandatory withdrawals, which means selling of US securities. Wouldn't this add to the downward pressure on stock market prices?See the fattening of the population pyramid downwards.

Just a minor additional point. The US government temporary suspended the mandatory withdrawal of 401Ks for year 2009 and thereby effectively postponing such withdrawals to a later date, giving the explanation that forced withdrawals in such current environments would cause a realised loss for retirees. That makes sense. But another additional reason, in our opinion, is that it would cause additional downward pressure on US stock prices. Duh.....

So great, all this, baby boomers, postponed mandatory withdrawals should just add to the relatively sub-par performance of the US stock market in the future...don't you think?

Updated in response to the first comment.

A random search brought up this chart by the US Census Bureau. This is showing data in year 2000 and 2002. Let us focus on year 2002.

As can be seen below the amount of stocks and mutual funds US persons are holding are USD20,665. The amount in 401K is USD21,450. So, the amount of 401K is not insignificant. Granted, not all 401K are in stocks....


Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

10 comments:

  1. interesting piece there bout the mandatory withdrawal of 401k.

    think the effect of 401k draw down should be spread out, starting from 59.5 to 70.5yrs. don't think most retirees have means to postpone withdrawal till 70.5yrs.

    but do agree that the population stats pt to more pple hitting the 401k draw down age range.

    btw, what will be the actual dollar amt effect, any idea? need to look at the avg 401k acc balance for the avg retiree (should be down substantially due to current crisis).

    think ok to long US stocks for the LT. many well known counters are at their lowest in decades (like GE mentioned above). caveat emptor, of course.

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  2. What’s The Property Financing?

    Property investment is a term that most people are familiar with. People usually invest money when they have a surplus or when they are planning for the future. The very careful ones opt for government securities and the adventurous ones go for stock markets. Where does the property investment stand on this line between the secure and the risky?
    If anybody is thinking long term then property has no parallel as it has been seen that in a larger time frame land never betrays. Property can be used to get rental income or can be used to secure a loan for any business venture alongside the property. Property investment also requires detailed research before the deal is drawn. Bear in mind that if the property is upon a disputed land then there are risks of recurring loss. On the other hand, if the property is situated at a location where many facilities are accessible then the prices will appreciate significantly over time. Any kind of Property Investment has been and shall always be one of the best kinds of solid investment opportunities.

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  3. Hi to anonymous,

    Posted a chart about your query. Hope it answers your question...even if partially =).

    Hi Finance Entry,

    Property is generally a leveraged tool and there are many factors involved...dont think it is right that property has no parallel.....its a long story..

    SGDividends

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  4. thanks for the chart. you're right bout not all 401k will be in stock funds:

    as one nears retirement, should be switching higher proportion of 401k portfolio out of stocks funds into fixed income/ money mkt.

    so if there's any effect of enhanced 401k draw down on stocks, should start feeling it now or effect already in progress.

    not saying there's no impact, just not sure bout the magnitude.

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  5. SGDividends - If your investment focus over the next 3-5 years is to focus on dividends vs capital gain... see you in the soup line, brother.

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  6. hi Last Anony (post Mar 21 8.03pm),

    Dividends is just one of the many factors we look at.

    We focus on dividends and capital gain.

    Maybe our name SGDividends make it seem we do so...nahh.

    SGDividends Team

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  7. Heyo.

    Nice thought provoking post you put up there.

    I read Dan Denning's Bull Hunter sometime back and he mentioned 4 threats to the US stock market.

    http://readingmaterials.blogspot.com/search/label/Investment%20-%20General

    It seems number 2 has already blown its top. Prob the next one coming will be its debt crisis. Lead by consumer debts?

    For your post, i think it pertains to obligations to the aging population. Stock investments in 401K will turn from inflow to outflow, possibly causing a "cascading selling" effect. Think we have to pay attention more to companies that advocate employee buying their own companies' shares.

    cheers!

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  8. hey Paul...

    Thanks for your comments and webmaster tools ! =)

    SGDividends

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  9. Nice information, There is obviously a lot. Your points are very valuable and knowledgeable. Thanks for sharing this great blog with us.

    ReplyDelete