It’s a commonplace idea for pensions: investment. Why is that? On average, investments yield higher profits than savings do. Because your pension capital is usually put aside for a long period of time, that is no problem whatsoever. The long period of time is important, because your can be sure of one thing when it comes to investing… You are going to have to deal with a crisis (or more) in which the exchanges take a nose-dive. Oil crisis, dotcom bubble or credit crunch, whatever their name might be. But equally you know that following those trying years of crisis will be plenty of years with upward trends. If you have a long-term perspective, these good years can compensate the bad ones and on average you’ll come out on top. Especially if you put aside money each month, because you’ll buy ‘cheap’ (during crises) as well as ‘expensive’ (when the rates are high). When you make contributions each month, you’re a lot less susceptible to temporary ups and downs in the exchange rates.
Is all that actually true?
For an illustration, see the sidebar. You can view the average returns of savings and investment starting from 1928 up until 2013 for every conceivable 20-year period. The year 1950 shows the average returns per year of saving or investment for the period 1930-1950. And the year 1980 the average returns for 1960-1980. That means there are 66 of these 20-year periods. For these periods all of the crises and bubbles have been taken into account.
Small print: Average returns per 20-year period from 1928 to 2013, based on a one-time payment of contributions. Investing: Data S&P (from 1928 onward), MSCI World Index (from 1969 in USD and euro-hedged from 2004). Saving: Data for US 3-month interest rate (from 1928 onward) and 3-month cash Libor interest rate (from 2004 onward). As you know, while past performance may teach us some valuable lessons, it does not guarantee future results. .
IIt turns out that in just 1 of these 66 periods savings yielded (slightly) higher returns than investment.And in 65 out of these 66 periods investments yielded (significantly) higher returns. If you have the time – like the period of time until your retirement – investment could be a smarter choice than saving.
Why would you invest anyway?
Why not just put your money into a savings account? You won’t have anything to do with good and bad trading years nor do you have to bother reading what’s on this page. We’ve illustrated the answer on the right: because saving often doesn’t accumulate enough capital for a decent pension. When you save, you can be pretty much certain you won’t or will hardly be able to make ends meet with the pension payments. The difference between (for example) 2.5% interest on savings and 6% returns on investments each year is enormous.
Small print: Assets at maturity based on annual returns of 2.5% for saving and 6% for investing. Suppose you set aside 500 euros a month over a 30-year period, after deducting all investment fees, without rebalancing and risk reduction. This merely serves as an example, to demonstrate the long-term effect of returns on investment – this means the information is for illustrative purposes only and that we accept no liability for any errors or omissions. .