Retirement Corner:
Are you really safer if you keep avoiding the stock market? A Nobel Prize Question


           When is a good time to invest in the stock market? Mark Twain was quoted as saying: “Wednesday and Monday are volatile; Friday is not good; Thursday as well as Tuesday are also uncertain.”  Everyone knows that investing in the stocks is risky. This is particularly so when retirees bet their lifetime’s savings on stocks. The question, however, is: are you safer by avoiding the stock market?

         While no one seems to have the answer to the above question but the Nobel Foundation may have. Before he died in 1896, Alfred Nobel donated about 31 million Swedish crowns (equivalent to USD 10 mm. then and USD 140 mm. now), of which 28 million crowns were used to set up the Nobel Foundation. A tremendous amount at the time, the seed money nonetheless would have grown to keep pace with the expenditures in awards to Nobel laureates in the past century, had it not been for the smart investment strategy of the fund managers.

          Alfred Nobel made it clear in his last will that the Foundation would invest in nothing but safe products, such as government bonds and certain other low-risk assets. This risk-averse approach, while commendable for its precautionary vision, had to come at the expense of possibly higher rates of return. Soon the Foundation found itself on the verge of no funds.
By 1953, the Foundation’s assets had shrunk to a mere USD 3 million. It faced the risk that its operations would grind to a halt. Fortunately board members of the Foundation finally came to realize the urgent need for a decisive shift in investment strategy. They agreed to engage heavily in the stock and real estate markets. That decision totally changed the fate of the then-crumbling Foundation.

          Forty years later, in 1993, the Nobel Foundation had amassed assets of more than USD 200 million. It now generates an annual operational income of more than USD 10 million. As a result, the Foundation has regained the capacity to pay out the committed awards and to cover operational costs, which come almost entirely from the yields from its stock investments.

          The Nobel Foundation handed out its first batch of awards in 1901, with an individual award worth 150,000 Swedish crowns (about USD 1 million today). However, the Foundation was thereafter unable to equal that amount until the end of the century. For example, in 1975 an award was worth 630,000 crowns, equivalent to a mere USD 100,000. It was not until 1991 when an individual award became 6 million Swedish crowns, achieving USD 1 million for the second time.

          But in 1992, no sooner had a Nobel Laureate received the 6.5 million crowns award; the Swedish crown was depreciated by a stunning 30% vs. the US dollar value. It seems that we have to add something to Mark Twain’s warning message: “Saturday and Sunday, when stock markets are closed, are also risky.” But the biggest risk of all is inflation. So are you safer by avoiding the stock market? The answer is definitely not. Risk and return go hand-in-hand, avoid one and the other one will pass you by. The secret to beating inflation is to invest for the long term in a well-diversified portfolio, comprising of stocks, real estate, commodities and alternative investments such as hedge and private equity funds. One such fund you can look at for long-term retirement purposes is the Finansa Retirement Mutual Fund (FAM RMF). Please see performance chart below.
Source: Shanghai Daily, September 2007