Connect with us

Markets in a Minute

Identifying Your Stage on the Investor Lifecycle

Published

on

This Markets in a Minute Chart is available as a poster.

Investor Lifecycle Diagram

This Markets in a Minute Chart is available as a poster.

Identifying Your Stage on the Investor Lifecycle

As people age and progress through their careers, their financial goals continuously evolve. Understanding one’s current goals, while also planning for those in the future, are two important elements of financial planning.

In this Markets in a Minute chart from New York Life Investments, we outline the investor lifecycle, a three-staged theory designed to help individuals optimize their portfolios as they age.

The Three Stages

Each lifecycle stage is associated with a set of distinct objectives that, when incorporated into a long-term investment plan, will guide the investor through to retirement.

Lifecycle StageCommon Short-term ObjectivesCommon Long-term Objectives 
Accumulation Stage (Ages 20-35)- Paying off student debt
- Buying real estate
- Building emergency savings
- Saving for children's education
- Accumulating wealth
Preparation Stage (Ages 35-60)- Taking vacations
- Funding children's education
- Planning for retirement
Retirement Stage (Ages 60+)- Achieving desired lifestyle
- Covering medical expenses
- Estate planning

These age-sensitive objectives will ultimately shape an investor’s risk profile and portfolio allocations.

The Accumulation Stage

Individuals in the accumulation stage are just beginning their careers, meaning they have a relatively low net worth and a long time horizon until retirement.

With over 30+ working years ahead of them, it’s often an ideal time for these investors to build more aggressive portfolios geared towards capital gains. In practice, this usually results in a significant allocation to equities.

This is because equities boast a relatively higher return potential, making them suitable for younger investors looking to accumulate wealth. Their long time horizons also allow them to ride out periods of short-term volatility that equity markets sometimes experience.

The Preparation Stage

Individuals in the preparation stage will likely reach their peak earning years, and as a result, will have a greater capacity to save and invest.

Getting the most out of this capacity will require these investors to establish a long-term financial plan centered around retirement. Because they now face a shorter time horizon, they may want to consider a more balanced risk profile.

While equities may still play a major role in these individuals’ portfolios, the asset class’s overall allocation is often dialed back in favor of safer securities such as investment-grade bonds.

The Retirement Stage

As individuals begin to retire, their risk profiles typically become more conservative. Capital preservation and steady income are the top priorities, and in most cases, portfolios become predominantly weighted towards fixed income and money market securities.

Retirees may want to retain an allocation to equities, however. The possibility of outliving one’s savings, also known as longevity risk, is a real possibility—especially given the higher medical costs associated with old age:

Age GroupAverage Annual Healthcare Spending ($)
0-18$3,749
19-44$4,856
45-64$10,212
65-84$16,977
85+$32,903

Source: Peter G. Peterson Foundation

According to the data, the average American experiences a sharp increase in medical costs once past the age of 45. This could spell the need for returns higher than what is provided by a fixed income-only portfolio. Maintaining exposure to equities—an asset class that has historically generated higher returns than fixed income—could help to mitigate longevity risk.

Putting It All Together

According to the investor lifecycle, a typical portfolio will transition through three broad stages over one’s lifetime. At each consecutive stage, the types of assets used should be adjusted to reflect the investor’s shifting risk profile.

By the final retirement stage, the appetite for risk is often low, and the core of a portfolio will be typically comprised of high quality, income-oriented investments. Careful monitoring of income and expenditures will also be required to reduce longevity risk.

While unique circumstances can sometimes warrant a deviation from the three stage lifecycle, its underlying theme still holds true—an investment portfolio should always be optimized to support one’s goals.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
Comments

Markets in a Minute

Visualizing S&P Performance in 2020, By Sector

Who were the big winners of 2020? We rank the S&P performance of 11 sectors—and provide possible explanations on why the market had a strong year.

Published

on

s&p sector performance charts

Visualizing S&P Performance in 2020, By Sector

With 2020 finally over, many are breathing a sigh of relief.

Investors faced a tumultuous year. Still, the S&P 500 finished strong with a 16% gain, outpacing its decade-long average by 4%. Many sectors that provided the new essentials—like online products, communication software and home materials—outperformed the market. It was, of course, a challenging year for other sectors including energy.

This Markets in a Minute graphic from New York Life Investments ranks the 2020 performance of every sector in the S&P 500 using data from S&P Global.

S&P Performance By Sector

As the world coped with devastating losses and uncertainty, how resilient were S&P 500 sectors?

Here’s how every sector performed, from top to bottom.

S&P 500 Sector2020 Price Return2019 Price Return10-Year Annualized ReturnsP/E (Trailing)*
Information Technology42.2%48.0%18.9%31.6
Consumer Discretionary32.1%26.2%16.0%48.1
Communication Services22.2%30.9%5.6%27.5
Materials18.1%21.9%6.6%40.4
Health Care11.4%18.7%13.8%25.3
Industrials9.0%26.8%9.6%28.9
Consumer Staples7.6%24.0%8.7%25.1
Utilities-2.8%22.2%7.2%21.1
Financials-4.1%29.2%8.6%15.3
Real Estate-5.2%24.9%6.6%36.3
Energy-37.3%7.6%-5.6%N/A
S&P 50016.3%28.9%11.6%31.2

*Trailing P/E measures market value divided by the last 12 months of earnings

As no surprise, technology came out on top with over 42% returns for the year.

COVID-19’s economic impact benefited the sector as activities, from work to socializing, moved online. In 2020, the tech sector’s returns were more than double its 18.9% average over the last decade.

Consumer discretionary was also one of 2020’s top sectors. Home to online marketplace giants along with electric vehicle companies, it posted a 32.1% return—surpassing its 2019 gains.

With -37.3% returns, energy was the hardest hit of all. Historic demand disruptions, along with OPEC tensions led to sector weakness. Like energy, real estate had a difficult year. Still, after declining 40% in March, by year-end, the sector mostly rebounded with just 5% losses.

Why The Market Had a Strong Year

Looking back, one of the biggest questions baffling investors is: why did the market perform so well? A number of factors, including government stimulus, low interest rates, and vaccine expectations can all help explain some of its behavior.

Government Stimulus

In March, the U.S. government approved a $2.2 trillion CARES-Act relief package, breaking historical records for stimulus. This helped create optimism in the market as individuals, small-businesses and corporations received financial relief.

At the same time, the Federal Reserve extended its “quantitative easing” policies that it introduced in 2008. Quantitative easing is when the central bank buys a number of longer-term securities. This type of measure is designed to boost economic activity through injecting liquidity into the market.

In 2020, the Federal Reserve began purchasing corporate bonds and other assets—on top of treasuries and mortgage-backed securities (MBS)—for the first time ever. In fact, the Federal Reserve is now estimated to 34% of MBS in the U.S. to help protect American homeowners.

Low Interest Rates

Another force that may have contributed to S&P performance in 2020 was the Federal Reserve’s low-interest rate policy.

Low interest rates mean that borrowing costs are low, which can be favorable for business conditions. In September, the Federal Reserve announced a “lower for longer policy”, stating that it won’t raise rates until 2023.

Vaccine Expectations

The promise of a vaccine rollout has contributed to S&P 500 performance momentum, along with expectations that things could return to normal in 2021. It also corresponded with double-digit gains for the health care sector.

Though roadblocks and uncertainties remain, vaccine announcements in November also helped spur an uptick in the energy sector, which will be influenced by global vaccine efforts in the months ahead. This, in turn, will help travel resume to normal and spark oil & gas demand.

S&P Performance: What Comes Next in 2021

With the first year of the pandemic behind us, it’s hard to say how the story will continue.

As countries acquire vaccines, there is hope for S&P 500 performance, and future stimulus measures could prop up the stock market. Of course, both the containment of the virus and people feeling safe will have an outsized impact on S&P sectors in the shift to a post-pandemic world.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Markets in a Minute

How Do Countries Around the World Compensate for Equity Risk?

Published

on

Equity Risk Premiums

How Do Countries Compensate Investors for Equity Risk?

When investors purchase stocks internationally, they are exposed to additional risks. Companies may have higher volatility based on a country’s economic, political, and legal conditions. In exchange for taking on the additional risk, investors demand a higher return potential, known as an equity risk premium.

Which countries have the highest premiums? In this Markets in a Minute from New York Life Investments, we explore equity risk premiums for countries around the world.

Behind the Numbers

The premiums are based on a study by a New York University researcher, Aswath Damodaran. All data is as of July 1, 2020.

Here are the steps Damodaran took to determine a country’s equity risk premium:

StepExample - Brazil
1. Find a country’s credit (bond) risk rating.Credit risk rating: Ba2
2. Based on that rating, determine the credit spread, which is the additional yield over a risk-free investment.Credit spread for Ba2 rating = 3.53%
3. To account for the additional risk stocks carry over bonds, multiply the credit spread by the relative equity market volatility.

This is the country risk premium.
3.53% credit spread x 1.25 relative equity market volatility

= 4.41% country risk premium
4. Add the country risk premium to the mature market risk premium (obtained by using the S&P 500 risk premium).4.41% country risk premium + 5.23% mature market risk premium
5. The resulting value is the country equity risk premium.9.64% country equity risk premium

Premiums will shift over time as a country’s credit rating, credit spread, and equity market volatility changes.

Equity Risk Premiums by Country

Below, we look at how equity risk premiums break down for 177 countries and regions, organized from highest to lowest.

CountryEquity Risk Premium
Sudan27.14%
Venezuela27.14%
Yemen, Republic27.14%
Algeria22.86%
Argentina22.86%
Guinea22.86%
Haiti22.86%
Korea, D.P.R.22.86%
Lebanon22.86%
Liberia22.86%
Somalia22.86%
Syria22.86%
Zambia22.86%
Zimbabwe22.86%
Ecuador19.92%
Congo (Republic of)18.46%
Cuba18.46%
Iran18.46%
Libya18.46%
Malawi18.46%
Mozambique18.46%
Sierra Leone18.46%
Barbados16.25%
Belize16.25%
Congo (Democratic Republic of)16.25%
Gabon16.25%
Guinea-Bissau16.25%
Iraq16.25%
Angola14.79%
Belarus14.79%
Bosnia and Herzegovina14.79%
El Salvador14.79%
Gambia14.79%
Ghana14.79%
Madagascar14.79%
Maldives14.79%
Mali14.79%
Moldova14.79%
Mongolia14.79%
Myanmar14.79%
Nicaragua14.79%
Niger14.79%
Pakistan14.79%
Solomon Islands14.79%
St. Vincent & the Grenadines14.79%
Suriname14.79%
Tajikistan14.79%
Togo14.79%
Ukraine14.79%
Bahrain13.32%
Benin13.32%
Burkina Faso13.32%
Cambodia13.32%
Cameroon13.32%
Cape Verde13.32%
Costa Rica13.32%
Egypt13.32%
Ethiopia13.32%
Guyana13.32%
Jamaica13.32%
Kenya13.32%
Kyrgyzstan13.32%
Nigeria13.32%
Papua New Guinea13.32%
Rwanda13.32%
Sri Lanka13.32%
Swaziland13.32%
Tunisia13.32%
Uganda13.32%
Albania11.84%
Bolivia11.84%
Cook Islands11.84%
Greece11.84%
Honduras11.84%
Jordan11.84%
Montenegro11.84%
Tanzania11.84%
Turkey11.84%
Uzbekistan11.84%
Armenia10.52%
Bangladesh10.52%
Côte d'Ivoire10.52%
Dominican Republic10.52%
Fiji10.52%
Macedonia10.52%
Oman10.52%
Senegal10.52%
Serbia10.52%
Vietnam10.52%
Azerbaijan9.64%
Bahamas9.64%
Brazil9.64%
Croatia9.64%
Cyprus9.64%
Georgia9.64%
Namibia9.64%
Guatemala8.90%
Morocco8.90%
Paraguay8.90%
South Africa8.90%
Trinidad and Tobago8.90%
Hungary8.46%
India8.46%
Italy8.46%
Kazakhstan8.46%
Montserrat8.46%
Portugal8.46%
Romania8.46%
Russia8.46%
St. Maarten8.46%
Andorra (Principality of)8.03%
Bulgaria8.03%
Colombia8.03%
Curacao8.03%
Indonesia8.03%
Philippines8.03%
Sharjah8.03%
Uruguay8.03%
Aruba7.58%
Mauritius7.58%
Mexico7.58%
Panama7.58%
Slovenia7.58%
Spain7.58%
Thailand7.58%
Turks and Caicos Islands7.58%
Laos6.99%
Latvia6.99%
Lithuania6.99%
Malaysia6.99%
Peru6.99%
Bermuda6.48%
Botswana6.48%
Brunei6.48%
Iceland6.48%
Ireland6.48%
Malta6.48%
Poland6.48%
Ras Al Khaimah (Emirate of)6.48%
Slovakia6.48%
Chile6.26%
China6.26%
Estonia6.26%
Israel6.26%
Japan6.26%
Saudi Arabia6.26%
Belgium6.12%
Cayman Islands6.12%
Czech Republic6.12%
Guernsey (States of)6.12%
Hong Kong6.12%
Jersey (States of)6.12%
Macao6.12%
Qatar6.12%
Taiwan6.12%
Abu Dhabi5.96%
France5.96%
Isle of Man5.96%
Korea5.96%
Kuwait5.96%
United Arab Emirates5.96%
United Kingdom5.96%
Austria5.81%
Finland5.81%
Australia5.23%
Canada5.23%
Denmark5.23%
Germany5.23%
Liechtenstein5.23%
Luxembourg5.23%
Netherlands5.23%
New Zealand5.23%
Norway5.23%
Singapore5.23%
Sweden5.23%
Switzerland5.23%
United States5.23%

Venezuela, Sudan, and Yemen are tied for the highest equity risk premium. While Venezuela battles hyperinflation, Yemen is suffering from a humanitarian crisis and Sudan has high perceived corruption.

In the mid-range, emerging countries such as Brazil, South Africa, and India carry moderate risk. However, they may also provide investors with higher returns than can be expected in mature markets.

On the low end of the scale, countries such as the United States, Singapore, and Germany have AAA credit ratings and the lowest premium of 5.23%.

Applying Risk Premiums to Companies

How can investors determine the equity risk premiums for individual companies?

One method is to assume that all companies incorporated in a country have equal exposure to that country’s risk. However, this is a simplified approach and does not account for the fact that a company’s operations may extend into other markets.

Alternatively, investors can calculate a weighted-average premium based on the location of a company’s revenue or production. For example, a consumer products business may weigh exposure based on the location of their revenue. An oil and gas company, where true risk lies in their reserves rather than where they sell, may instead be weighted by production.

Here’s a hypothetical example for an oil & gas company that has reserves in the United States, Saudi Arabia, and Venezuela:

CountryProduction (in kboed)*% of TotalEquity Risk Premium
Total300100%14.41%
U.S.6020%5.23%
Saudi Arabia12040%6.26%
Venezuela12040%27.14%

* Kilobarrels of oil equivalent per day.

The weighted-average equity risk premium is 14.41%.

Importantly, even countries headquartered in mature markets have international risks if they carry out operations in other countries.

Risk Vs. Potential Reward

Every country presents varying degrees of risk based on local conditions. As investors look to diversify internationally, it’s critical to consider two factors:

  • The additional risk
  • The potential additional return

Equity risk premiums serve as a guide that can help investors compare country risk, and the additional return potential they should expect for tolerating that risk.

Advisor channel footer

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading
New York Life Investments Company Spotlight

Subscribe

Are you a financial advisor?

Subscribe here to get every update, including when new charts or infographics go live:

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular