Investing for your future

Baruch Labinsky- Financial Planner, Israel Resource Network
This is the third in a 3-part series on Financial Planning in Israel.

The basic concepts are really important or you can’t do anything – you need to understand what you’re doing when you invest. An important “rule” to keep in mind is the Rule of 72 – divide a number into 72, and the result is how many years it would take for your money to double. So if you get 10% each year you’ll double your investment after roughly 7.2 years.

Two things you always have to take into account with investing are 1) taxes and 2) inflation – inflation always eats away at the real value of our investment. Inflation went up 4% over the past year in Israel, so if you made less than 5% on your investment you lost money – 4% plus what you paid on taxes. You need to make 5% just to break even, but your money isn’t really growing.

Compounding means your money can do tremendous things just by natural growth. It means you make money not just on what you initially invested but what you earn over the years. Getting 15% vs 5% isn’t just a difference of 10%, it’s 10% compounded. So the more time you have to invest the better you can do with larger gains even if the market goes up and down over the years. You may lose in the short term but you need to focus on your long term goals.

It’s important to put together an investment plan that matches our goals, our risk level, and time available (ie how many years till retirement will affect how aggressive you invest your retirement plan). Money needs time in order to grow, so start as early as you can. You can also help the next generation and start putting money away for them now.

There is a spectrum on investments – ultra conservative would be a savings account, or government bonds. Middle road would include stocks, real estate, corporate bonds. Stocks are an investment in a company – you own a part of the company. More speculative investments are options trading, hedge funds (which have the possibility to make money even when the market isn’t doing well). There are many options with investing, but you have to know what the money is for – do you need to take out the money soon, or can you let it sit for 30 years? You have to plan and know what level of risk you are comfortable with.

Stock prices don’t always go up or down based on exactly how the company does, stock prices are really based on expectations and psychology. If there is more demand in the market for the supply of stocks, that drives up the price. Prices really reflect what people are willing to pay, not always what a company is really worth. Much of investment is based on 1) fear and 2) greed.

When the market is really good, and everyone is talking about how great investing is, that’s already the end of the cycle – the average person invests out of greed because they hear so many people are making money. Then things drop, and they panic and sell – fear. They are the ones who lose out – they’ve bought high, and sell low. If they had an investing plan, and they held on for the long term, they would have been able to ride out the short term downslide.

You need to have a long term plan, not make decisions based on emotion. You can’t be right all the time, there are plenty of professional investors losing money all the time. Therefore it’s important to diversify and invest in different places - you’ll have more of a chance of succeeding. You need to have a plan and the discipline to follow it.

You can invest in mutual funds, which are a basket of stocks – so if one goes down hopefully another one is going up. Studies have found that people who invest in no-load funds, which means no fee to go in and out of the fund, have a lower return than people who join load funds. It should be the opposite, because they are saving all that money in fees, but since they don’t stay in for the long haul they tend to lose.

Israeli investing

The investment market is divided into 3 types of investments:

1)      Real Estate - which in this country is a real insiders market, a small number of people control the majority of real estate in the country and you need to be an insider to get good prices

2)      Bonds

3)      Stocks – this can be divided into mutual funds, ETFs, etc

There are two main places you can hold your money in Israel – through the banks, or through private brokerage houses. Banks by law are not allowed to manage people’s money. They can give you investment advice, but can’t manage the money for you so you’re really investing on your own. Most people invest in mutual funds when they invest this way. All the fees are built in so the investor generally doesn’t know how much they are really paying.

You can invest through a brokerage house, which is private. They invest for you and can actually manage your money for you in addition to selling you funds and giving advice. You can give your money over to them and they determine (together with you) the level of risk you want and then they can invest for you. Fees are much more transparent because they are obligated by law to be clear about everything.

The other way to invest is through the Bituach Menahalim and Keren Pensiot – long term savings plans that are basically run by the insurance companies. They invest your money, generally in all the other securities that everyone else is investing in (stocks, corporate bonds, etc). These funds have 3 components: 1) Life insurance 2) Disability insurance 3) the investment. Plus the fees the companies are charging for all this.

There is also Keren Hishtalmut, which is a 6 year savings plan that becomes liquid after 6 years.

Most of the time all people know when they are investing in these funds is that they are investing in something – it’s money for retirement, but I don’t read or understand the reports. It’s important to understand who’s managing your money and what they are doing. The Ministry of Finance has a website where you can investigate how various funds are doing.

There is a major problem with retirement funds in this country. You start contributing let’s say when you’re 25. You continue to invest for 40 years. At 63 you’re investing in the exact same fund you invested in at 25 – but should you be investing in the same fund 2 years from retirement? Probably not – you may want to invest more aggressively, or less, if you know you need the money sooner. You should evaluate where you stand and make sure you’re going to hit your original investment goals (which were set along time ago, so you need to track it).

You shouldn’t be jumping every year, but you should be aware of where you stand with your investments because you may want to switch at some point to maximize your investments.