Will You Outlive Your Savings?
The desire to live longer — and outrun death — is ingrained in the human spirit. The first emperor of China, Qin Shi Huang, may have even drank mercury in his quest for immortality.
Over time, advice for living longer has become more practical: eat well, get regular exercise, seek medical advice. However, as life expectancies increase, many individuals will struggle to save enough for their lengthy retirement years.
Today’s infographic comes from New York Life Investments, and it uncovers how holding a stronger equity weighting in your portfolio may help you save enough funds for your lifespan.
Longer Life Expectancies
Around the world, more people are living longer.
|Year||Life Expectancy at Birth, World|
Despite this, many people underestimate how long they’ll live. Why?
- They compare to older relatives.
Approximately 25% of variation in lifespan is a product of ancestry, but it’s not the only factor that matters. Gender, lifestyle, exercise, diet, and even socioeconomic status also have a large impact. Even more importantly, breakthroughs in healthcare and technology have contributed to longer life expectancies over the last century.
- They refer to life expectancy at birth.
This is the most commonly quoted statistic. However, life expectancies rise as individuals age. This is because they have survived many potential causes of untimely death — including higher mortality risks often associated with childhood.
Amid the longer lifespans and inaccurate predictions, a problem is brewing.
Currently, 35% of U.S. households do not participate in any retirement savings plan. Among those who do, the median household only has $1,100 in its retirement account.
Enter longevity risk: many investors are facing the possibility that they will outlive their retirement savings.
So, what’s the solution? One strategy lies in the composition of an investor’s portfolio.
The Case for a Stronger Equity Weighting
One of the most important decisions an investor will make is their asset allocation.
As a guide, many individuals have referred to the “100-age” rule. For example, a 40-year-old would hold 60% in stocks while an 80-year-old would hold 20% in stocks.
As life expectancies rise and time horizons lengthen, a more aggressive portfolio has become increasingly important. Today, professionals suggest a rule closer to 110-age or 120-age.
There are many reasons why investors should consider holding a strong equity weighting.
- Equities Have Strong Long-Term Performance
Equities deliver much higher returns than other asset classes over time. Not only do they outpace inflation by a wide margin, many also pay dividends that boost performance when reinvested.
- Small Yearly Withdrawals Limit Risk
Upon retirement, an investor usually withdraws only a small percentage of their portfolio each year. This limits the downside risk of equities, even in bear markets.
- Earning Potential Can Balance Portfolio Risk
Some healthy seniors are choosing to work in retirement to stay active. This means they have more earning potential, and are better equipped to recoup any losses their portfolio may experience.
- Time Horizons Extend Beyond Lifespan
Many individuals, particularly affluent investors, want to pass on their wealth to their loved ones upon their death. Given the longer time horizon, the portfolio is better equipped to ride out risk and maximize returns through equities.
Higher Risk, Higher Potential Reward
Holding equities can be an exercise in psychological discipline. An investor must be able to ride out the ups and downs in the stock market.
If they can, there’s a good chance they will be rewarded. By allocating more of their portfolio to equities, investors greatly increase the odds of retiring whenever they want — with funds that will last their entire lifetime.
How Carbon Offsetting Works, and What Investors Should Know
Eliminating all harmful GHG emissions is not yet possible, but carbon offsetting offers a route for businesses and funds to become more sustainable.
This infographic is available as a poster.
Carbon Offsetting: What Investors Should Know
In 2016, an international treaty known as the Paris Agreement was negotiated by member nations of the UN Framework Convention on Climate Change.
The long-term goal of this agreement is to limit the increase in global temperature to below 3.6°F (2°C) over the next century. Achieving this target will require the world to develop cleaner solutions across all areas of the economy, from energy to transportation.
In this infographic from New York Life Investments, we introduce carbon offsetting, an activity used by both businesses and investment funds that has the potential to accelerate the development of a more climate-friendly economy.
What are GHG Emissions, and Where do They Come From?
Greenhouse gases (GHGs) are a family of gases known to trap heat in the Earth’s atmosphere. The most prevalent among them is carbon dioxide (CO₂), which accounts for 80% of America’s GHG emissions. Common sources of CO₂ include fossil fuel consumption and deforestation.
Businesses are often significant emitters of CO₂, but due to the complexity of their production chains, emissions can be difficult to track. To combat this, a company’s carbon footprint is measured across three scopes:
- Scope 1: These are direct emissions from a company’s operations. An example would be the CO₂ emitted by company-owned factories.
- Scope 2: These are indirect emissions from a company’s operations, such as the pollution generated from purchased electricity.
- Scope 3: These are indirect emissions from the company’s supply chains. Common sources include the extraction of raw materials and business travel.
Although we understand that GHGs are harmful to the planet, our ability to eliminate them is limited by technology and costs. Fortunately, this is where offsetting can help.
How Does Carbon Offsetting Work?
Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent (CO₂e) that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every tonne of CO₂e negated.
Below are the three common types of GHG reduction programs.
1. Energy efficiency projects
These projects reduce energy consumption. One example is the distribution of energy-efficient cookstoves in Rwanda, a country where many people rely on firewood and charcoal. By distributing 10,800 cookstoves throughout the country, nearly 60,000 tonnes of CO₂e can be avoided each year.
2. Forestry projects
These projects nurture and protect our CO₂-absorbing forests. One notable example is the Garcia River forest protection program, which ensures the longevity of California’s redwood forests. The program oversees over 9,600 hectares which has been estimated to store almost 80,000 tonnes of CO₂e annually.
3. Renewable energy projects
These projects reduce our dependency on fossil fuels. They are especially effective in economies such as Taiwan, where 75% of electricity capacity relies on fossil fuels. Thanks to its strong coastal winds, Taiwan is able to remove 328,000 tonnes of CO₂e per year with just 62 wind turbines.
How is Offsetting Regulated?
Carbon offsetting in America is primarily a voluntary activity, but some state governments have made it mandatory for significant polluters. Here’s how both markets are regulated.
The Voluntary Market
The voluntary market is regulated by a variety of third-party organizations such as Verra, Gold Standard, and American Carbon.
They conduct audits on GHG reduction projects to ensure each one meets four broad criteria:
- Measurability: The GHG savings of the project must be measurable
- Verifiability: The results of the project must be verified on an annual basis
- Sustainability: Each project should have a minimum lifespan of seven years
- Additionality: GHG reductions of project must be considered in reference to a baseline scenario
Carbon credits are only issued after a project has passed this verification process.
The Mandatory Market
Some U.S. states have introduced carbon offsetting schemes to meet their climate goals. One of the largest is California’s Cap and Trade program which was introduced in 2013.
The program is targeted at businesses that emit over 25,000 tonnes of CO₂e annually, and works by setting a “cap” on total annual emissions. This cap is reduced each year, and overpolluting businesses must acquire carbon credits to offset their excess pollution. These can be purchased from state-administered auctions or from other firms.
Revenues generated from California’s carbon credit auctions are used to fund various GHG reduction projects, including:
- 690,000 acres of land preserved or restored
- 287,000 rebates issued for zero-emission and plug-in hybrid cars
- 108,000 urban tree plantings
- 150,000 energy efficiency projects installed in homes
By 2030, California’s emissions cap is intended to reach 200.5 million tonnes of CO₂e, marking a near 50% reduction from its 2015 level.
What Role can Investors Play?
A majority of U.S. investors consider themselves to be values-based, meaning they care about the societal and environmental impacts of their investments. This mentality is increasing the demand for ESG investing and placing pressure on corporations to become more sustainable.
For example, the percentage of S&P 500 firms that publish sustainability reports has risen from just 20% in 2011 to 90% in 2019. More importantly, a growing number of U.S. firms are cooperating with the CDP (formerly the Carbon Disclosure Project) to report their emissions and set formal reduction targets.
|Year||Companies with active emissions reduction targets||All other companies reporting to the CDP||Total|
Source: CDP 2020
Some of the world’s largest oil producers are also taking action—a testament to the significance of these shareholder concerns. Royal Dutch Shell announced earlier in 2020 that it intends to fully offset its Scope 1 and 2 emissions.
Does Offsetting Really Help?
Carbon offsetting programs such as the one implemented by California have the potential to generate revenues and encourage innovation. Critics, however, have suggested it has a number of design issues.
One such issue is the fact that California’s carbon credits do not expire. This could allow companies to stockpile credits and ignore future cuts to the emissions cap. Another concern is that the companies covered by California’s cap and trade will simply pass their higher costs to the consumer, although this claim didn’t seem to hold up in a 2016 study conducted by UCLA.
Other inefficiencies within the program may exist, but its benefits are hard to ignore. By the end of 2019, the revenue generated from California’s carbon credit auctions totaled $12.5 billion. Of this amount, over $5 billion has been invested in GHG reduction projects to date.
Tech Investing: Exploring the Sector’s Promising Potential
In the first 9 months of 2020, tech’s return was almost 5x greater than the general market’s return. Here’s what you need to know about tech investing.
This infographic is available as a poster.
Exploring the Potential of Tech Investing
Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.
What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.
Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.
Over a longer timeframe, however, tech’s performance is quite varied.
|S&P 500 Information Technology||S&P 500|
Data based on total returns.
Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.
In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.
The Tech Universe
While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:
- Software – such as application software, fintech, and cybersecurity.
- Hardware – such as electronic equipment, semiconductors, and self-driving cars.
- Internet Information – such as social networks, e-commerce, and digital advertising.
- Telecommunication – such as internet services, telephone operators, and cable companies.
In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.
What Investors Should Consider
There are many factors to consider with tech investing.
To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy.
- Risks and opportunities
Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing.
- Personal objectives
Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends.
- Company financials
It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.
With all this in mind, how do the sector’s risks measure up against its returns?
Potential Risk/Reward Payoff
Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.
Annualized risk-adjusted returns
|S&P 500 Information Technology||1.37||1.49||1.28|
|S&P 500 Consumer Staples||0.65||0.78||1.06|
|S&P 500 Utilities||0.52||0.76||0.84|
Risk is defined as standard deviation, calculated based on total returns using monthly values.
By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.
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