Recommend non-investing parents to have 10% in stocks?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Makane
Posts: 32
Joined: Sat Jun 29, 2013 3:15 pm

Recommend non-investing parents to have 10% in stocks?

Post by Makane »

My retired parents (70 & 67) in Europe don't invest.
They own their house, and other than that just hold 100% cash.
They receive 1600 euro in pension payout per month, which goes to 1200 euro when one of them passes. This is a bit short of monthly expenses, so yes, they do need the pile of cash, and yes a bit of growth on the pile of cash would be relevant.

According to current life expectancy in their country, my father still has 15 years and my mother still has 20 years to go.
I have recently thought about recommending them to hold 10% in VWRL (the euro version of "Vanguard Total World Stock ETF (VT)")
I'm thinking even 10% stocks is still better than 0%. It can stave off a bit of inflation or deliver a tiny bit of growth/preservation for the whole pile of cash.

I would recommend higher than 10% stocks, but they are of a generation in which index investing did not exist, only buying individual stocks.
So the only thing they knew is that stocks are risky and are a form of speculation.
I had them read some books on index investing which made them understand the concepts and they feel okay with them. Still, for non-investing risk-averse retirees like my parents, I think 10% stocks is probably the highest they can comfortably go at the moment. Perhaps, after 1 or 2 years, this will make them more used to the whole concept, and then maybe 20% stocks is in the cards one day.

1. Does anyone have experience with this or have any suggestions for me?
2. I know TIPS are a thing in the US. Are inflation-linked eurobonds used by anyone and could they be part of above scenario?
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Recommend non-investing parents to have 10% in stocks?

Post by delamer »

Did you mean that they can cover expenses with the 1600 euro, but the survivor cannot with 1200 euro?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
sunnywindy
Posts: 655
Joined: Sat Jan 18, 2014 3:42 pm
Location: Central California

Re: Recommend non-investing parents to have 10% in stocks?

Post by sunnywindy »

It sounds like in the future there is a possibility you will have to chip in to cover any shortfalls and it sounds like they are not going to be changing their ideas towards money anytime soon. So, you might want to think about your portfolio and how it may have to fund your life and theirs.
Powered by chocolate!
Mike Scott
Posts: 3579
Joined: Fri Jul 19, 2013 2:45 pm

Re: Recommend non-investing parents to have 10% in stocks?

Post by Mike Scott »

Moving toward 20% or even 25% stock index funds would be great if they are willing. For a different take, is there anything like a SPIA or reverse mortgage available?
User avatar
Mullins
Posts: 496
Joined: Wed May 08, 2019 4:38 pm

Re: Recommend non-investing parents to have 10% in stocks?

Post by Mullins »

Makane wrote: Wed Dec 01, 2021 9:00 am Perhaps, after 1 or 2 years, this will make them more used to the whole concept, and then maybe 20% stocks is in the cards one day.
Unless the market takes a dive in that time, which then your parents will rue the day they bought stocks, naturally. Hindsight contains a fair amount of recency bias.
"The Quality of the Answer Depends on the Quality of Your Question."
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Recommend non-investing parents to have 10% in stocks?

Post by MattB »

Makane wrote: Wed Dec 01, 2021 9:00 am My retired parents (70 & 67) in Europe don't invest.
They own their house, and other than that just hold 100% cash.
They receive 1600 euro in pension payout per month, which goes to 1200 euro when one of them passes. This is a bit short of monthly expenses, so yes, they do need the pile of cash, and yes a bit of growth on the pile of cash would be relevant.

According to current life expectancy in their country, my father still has 15 years and my mother still has 20 years to go.
I have recently thought about recommending them to hold 10% in VWRL (the euro version of "Vanguard Total World Stock ETF (VT)")
I'm thinking even 10% stocks is still better than 0%. It can stave off a bit of inflation or deliver a tiny bit of growth/preservation for the whole pile of cash.

I would recommend higher than 10% stocks, but they are of a generation in which index investing did not exist, only buying individual stocks.
So the only thing they knew is that stocks are risky and are a form of speculation.
I had them read some books on index investing which made them understand the concepts and they feel okay with them. Still, for non-investing risk-averse retirees like my parents, I think 10% stocks is probably the highest they can comfortably go at the moment. Perhaps, after 1 or 2 years, this will make them more used to the whole concept, and then maybe 20% stocks is in the cards one day.

1. Does anyone have experience with this or have any suggestions for me?
2. I know TIPS are a thing in the US. Are inflation-linked eurobonds used by anyone and could they be part of above scenario?
You omitted a key piece of information, how much cash they have.

Your parents may not have any need to risk their nest egg in the market if it will sustain the surviving spouse for the remainder of their. OTOH, your parent's nest egg may not be large enough to support the surviving spouse for the remainder of their life. Therein lies the rub.

I suggest you figure out their need, willingness, and ability to take risk before making any suggestions.
Ramjet
Posts: 1464
Joined: Thu Feb 06, 2020 10:45 am

Re: Recommend non-investing parents to have 10% in stocks?

Post by Ramjet »

20/80 portfolio should keep up with inflation. Equity below that, I would not be so sure
User avatar
Topic Author
Makane
Posts: 32
Joined: Sat Jun 29, 2013 3:15 pm

Re: Recommend non-investing parents to have 10% in stocks?

Post by Makane »

Thanks to everyone for their thoughtful inputs, replies below:
delamer wrote: Wed Dec 01, 2021 9:58 am Did you mean that they can cover expenses with the 1600 euro, but the survivor cannot with 1200 euro?
Yes. They are drawing down a little bit now, and the survivor will draw down even more with only 1200 monthly pension.
But planning budgets like this is not an exact science, because with older age and health problems the medical bills can still cause big expenses and run the nest egg to zero at some point. That's okay. They have 3 children to support them which eventually is traditional human societies' backup plan.
My main point is simply to stretch the nest egg's resilience and duration by changing 100% cash to 90% cash + 10% stocks.
The 15 and 20 years life expectancy are averages, so it could turn out one of them still lives another 25 or 30 years.
Over such a period, adding 10% stocks (or 20%) should be beneficial.
Inflation (2%) and an annual wealth tax (between 1% and 2%) combined will halve the purchasing power of this pile of cash in 20 years, which I feel they do not properly consider.
sunnywindy wrote: Wed Dec 01, 2021 10:07 am It sounds like in the future there is a possibility you will have to chip in to cover any shortfalls and it sounds like they are not going to be changing their ideas towards money anytime soon. So, you might want to think about your portfolio and how it may have to fund your life and theirs.
You are correct.
Mike Scott wrote: Wed Dec 01, 2021 10:21 am Moving toward 20% or even 25% stock index funds would be great if they are willing. For a different take, is there anything like a SPIA or reverse mortgage available?
SPIA: Yes they exist. But I don't think my parents can be convinced to part with their cash to an insurance company, and just trust the insurance company to make the monthly annuity payments. Besides, if they want to move to another house or replace their car, they still need cash, so they value cash. The idea of 10% or 20% stocks is that this way they still have a whole lot of cash, while getting some of the benefits of participating in the stock market.

Reverse mortgage: Available, but I vaguely recall the terms that banks offer on those are not very good. Alternatively perhaps it is possible to reverse-mortgage directly with their children without the bank taking a cut, I have to check this with the notary office.
Mullins wrote: Wed Dec 01, 2021 12:16 pm
Makane wrote: Wed Dec 01, 2021 9:00 am Perhaps, after 1 or 2 years, this will make them more used to the whole concept, and then maybe 20% stocks is in the cards one day.
Unless the market takes a dive in that time, which then your parents will rue the day they bought stocks, naturally. Hindsight contains a fair amount of recency bias.
You are right. But then again if you only have 10% of your portfolio in stocks, the pain should not be too bad.
My point is that participation in the stock market with 10% or 20% is probably better than 0%, if you still have 20 years or possibly 30 years to go.
MattB wrote: Wed Dec 01, 2021 12:50 pm
Makane wrote: Wed Dec 01, 2021 9:00 am ...
You omitted a key piece of information, how much cash they have.

Your parents may not have any need to risk their nest egg in the market if it will sustain the surviving spouse for the remainder of their. OTOH, your parent's nest egg may not be large enough to support the surviving spouse for the remainder of their life. Therein lies the rub.

I suggest you figure out their need, willingness, and ability to take risk before making any suggestions.
I tried to signal the amount of cash with this: "This is a bit short of monthly expenses, so yes, they do need the pile of cash, and yes a bit of growth on the pile of cash would be relevant." but I understand I have not been clear, so I will elaborate:

- Suffice to say it is a reasonable pile of cash, but in a calculation on 20 years of drawing it down a bit each month it would mostly deplete it, and if longevity turns out to be 30 years, it would certainly run to zero.
- Plus there are reasonable chances of expensive medical or elderly care bills, which lead me to believe here is a reasonable chance of reaching zero in a longer-than-expected longevity scenario.
- And I'm not even considering inflation and wealth tax which together will halve purchasing power of this pile of cash in 20 years.

I'll admit that I myself also hate seeing a pile of cash losing most of its purchasing power through inflation and a consistent annual wealth tax over a 20-30 year period. That's my personal bias and plays into my own thinking and reasoning. In my own portfolio I hold mostly real estate & index funds, some alternative investments and barely 5% cash.
Ramjet wrote: Wed Dec 01, 2021 1:08 pm 20/80 portfolio should keep up with inflation. Equity below that, I would not be so sure
20% stocks / 80% cash right?
Sounds about right to me.
Ramjet
Posts: 1464
Joined: Thu Feb 06, 2020 10:45 am

Re: Recommend non-investing parents to have 10% in stocks?

Post by Ramjet »

Makane wrote: Wed Dec 01, 2021 9:30 pm
Ramjet wrote: Wed Dec 01, 2021 1:08 pm 20/80 portfolio should keep up with inflation. Equity below that, I would not be so sure
20% stocks / 80% cash right?
Sounds about right to me.
Yeah. Take a look at Vanguards Life Strategy funds. One is 20/80 I believe
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: Recommend non-investing parents to have 10% in stocks?

Post by MattB »

Makane wrote: Wed Dec 01, 2021 9:30 pm I'll admit that I myself also hate seeing a pile of cash losing most of its purchasing power through inflation and a consistent annual wealth tax over a 20-30 year period. That's my personal bias and plays into my own thinking and reasoning. In my own portfolio I hold mostly real estate & index funds, some alternative investments and barely 5% cash.
I would have the same problem.

It sounds like you have a fair understanding of your parent's need to take risk. Good luck working on their willingness and ability. They should benefit from investing, even heavily conservative investing, over the long term. And I hope they do.
Post Reply