Why Tempted SGDividends Are Not Investing into US Equities....

Aww man...we like Krafts and General Electric. Why? Do you know that Krafts are the brandowners of Oreo Cookies? Their financial ratios are not outstanding but they did a restructuring just 2-3 years ago which makes sense and we have the gut feeling that Irene B. Rosenfeld is a good leader.( we don't really like it that she is both chairman and CEO though...). How about General Electric?General Electric are beseiged by their GE Capital..but their other divisions are going damn strong. Just click on the links of key developments for GE under Reuters, compare with other companies you think are big and you will understand. But we are not investing in these, neither are we intending to do so( unless something interesting happens). Among many reasons such as the exchange rate risks, the lack of a homeground advantage as Singaporean investors, we just found another reason to not invest in US equities. (If you are trader, yeah think US market is for you...its damn volatile . Investing and Trading are different)

This reason is not new actually..think we read it in a book initially and it makes sense to us. It suggests that the US stock market will not be able to see as good a returns as the past due to the mandatory withdrawal of US citizens of their 401Ks at age 70.5years. Just in case, as a Singaporean and you are not familiar with 401Ks, its like a retirement account, similar to our Singapore Supplementary Retirement Scheme (SRS) which was incepted somewhere in year 2001. Below is a summary timeline of 401Ks..

Let's look at the current population pyramid of US as of year 2009. ( taken from their Censeus Bureaus....don't play play and who says Geography is useless, we will punch you..see how useful it is!)It should be noted that the inception of 401Ks was around year 1978. That means that as of current year 2009, about 31 years have passed, enough time for US citizens to have amassed a large amount of equities or mutual funds and other securities in their 401Ks. Add to that, as can be seen from the population pyramid above, the baby boombers are coming of age. At around 6-10 years time, the currently 60-64 age group would have to begin mandatory withdrawals, which means selling of US securities. Wouldn't this add to the downward pressure on stock market prices?See the fattening of the population pyramid downwards.

Just a minor additional point. The US government temporary suspended the mandatory withdrawal of 401Ks for year 2009 and thereby effectively postponing such withdrawals to a later date, giving the explanation that forced withdrawals in such current environments would cause a realised loss for retirees. That makes sense. But another additional reason, in our opinion, is that it would cause additional downward pressure on US stock prices. Duh.....

So great, all this, baby boomers, postponed mandatory withdrawals should just add to the relatively sub-par performance of the US stock market in the future...don't you think?

A random search brought up this chart by the US Census Bureau. This is showing data in year 2000 and 2002. Let us focus on year 2002.

As can be seen below the amount of stocks and mutual funds US persons are holding are USD20,665. The amount in 401K is USD21,450. So, the amount of 401K is not insignificant. Granted, not all 401K are in stocks....