Solvency forecasts for pension funds are gloomy in most countries. In the United States and in Europe, the residual defined benefit plans will mostly go away or be strongly reduced due to the impossibility to finance an ageing population. Due to longer life expectancy, the time of retirement will also be changing and become more flexible. In Switzerland for instance, the three pillars will be insufficient and political blockages combined with individual egoism prevent a solution from being found.
Everyone must therefore build up what I will call a 4th pillar for their retirement. A house is a way to contribute to this fourth pillar, but too much cash is a bad solution. Indeed, the real value of the same amount of money will decrease with time and the ridiculous yields of bonds make them unfit to compensate inflation. Stocks, in spite of their higher volatility and high current price level, allow to build up a diversified capital in terms of industries and currencies (nobody knows the relative value of the Swiss franc, euro or its main currency in 20 years) and to fight against inflation.
Stocks should be a long-term investment to share in the performance of companies and reap a residual share of their profit. You shall remember that wars, pandemics, depressions, recessions, inflation and other new factors may strongly reduce your wealth temporarily, but stocks are the best way to participate in the growth of the economy.
As mentioned by Charles Ellis in Winning the Loser’s Game: “You should set your portfolios’ asset mix at the highest ratio of equities that your economic and emotional limitations can afford and sustain over the long term.” But not higher.
Historically, stocks of publicly owned companies have offered high long-term returns. It follows the growth of the economy and shall help you accumulate funds. However, they are not a magical instrument: they are volatile and the return over the next decade may not be as high as recently because of their high valuations due to low interest rates.
Guide Finances 