Introduction: From Ice Cream to Stone
In order to achieve stability and growth, a balance must be made between two basic types of investments – debt and equity. Debt is as simple as it sounds – I loan you money and you pay me back (with interest). Debt usually comes in the form of a bond, but can be in outright loans and certificates of deposits. Equity is an investment into an entity for which one expects a return that is somehow connected with the success of the investment – for example I invest $100 into your business, but we agree to share all the profits 50/50. Equity usually comes in the form of stocks, funds and options (options are kind of like insurance on stocks). Most pension funds provide a mix between cash, debt, and equity. Generally speaking, cash is the most stable, debt is a bit less, and equity is the most risky. On the other hand, potential return on investment is the result of risk, so cash will make you the least money, debt can make a bit more, and equity can bring the greatest returns.
A younger investor has more time to recoup his loss, so he or she can take some additional risk and should in most cases aim for a fairly stable investment that allows for some flexibility (ice cream). As time goes on, flexibility in a luxury that simply cannot be had. In this case one should look for a more solid investment (stone). There is no reason for anyone in their mid 60’s to be invested in stocks, just as there is no reason for anyone in their mid 20’s to avoid them. One of the jobs of a good insurance agent of pension advisor is to help you understand your level or risk and to help you find the product with which you will maximize your return based on the risk you are willing to take.
There are many different funds, but to simplify the matter, there are generally eight different styles of pensions plans or kranot pensia, offered by a total of 10 different companies.
Investing in Accordance with Age / The Chilean Method
The Chilean method of investing (I don’t know why they call it this, but I know they only call it this in Israel) is when funds are divided by different age groups so that the younger investor invests in a fund with more risk that becomes more conservative as he or she ages.
Menorah has probably the best Chillean system where they divide people into groups in block of 5 years. Phoenix has one where you choose a starting risk preference and it gets more conservative over time.
As of 2016, all companies now offer a new method of investing where all investors are put into funds and automatically change according to age.
Alternatively, you can invest as you like in the following funds, regardless of your age:
Young People Funds
These funds are designed for younger investors, those who would are willing to take more risk and gain more, but also have the time to recoup their losses if anything goes sour. These funds invest more heavily in stocks and corporate bonds and less so government securities. Most companies call this the track for people “aged 50 and under.”
Mid Aged People Funds
These funds are designed for mid aged investors, those who need something a bit more solid that the Funds for Younger Investors. Most companies call this the track for people “aged 50 to 60.”
Older People Funds
These funds are designed for older investors, those who should have as little risk as possible. Most companies call this the track for people “aged 60 and up.”
Ultra-Conservative Funds (no stocks)
These are funds with no stocks and are appropriate for people close to retirement. An alternative to this is the Older People Funds mentioned above. In my opinion, almost every single person in their 60’s should be invested in one of these two funds. Thousands of Israelis lost their pensions in the crisis of 2008 and will suffer for the rest of their lives because investors, insurance companies and individuals did not take the appropriate measures to ensure that their money was invested conservatively; do not let this happen to you.
Aggressive Funds (more stocks)
This kind of fund is similar to the Young People Fund above, but even more aggressive, with 50% stocks. This is suitable for younger investors or those with a higher preference for risk.
Halachic funds are invested in accordance with Haredi Halacha and are supervised by the Badatz. I am not a posek, but I will review the main issues here and recommend that each person discuss this with his or her own Rabbi. The issue is not interest; almost al companies have a heter iska. The main issue is benefiting from prohibited things such as work on shabbat and chametz on Pesach. From my understanding, Rav Moshe and most American poskim hold that the level of ownership is too indirect to be called ownership (owning stock in Nestle doesn’t entitle you to a box of Cheerios), while the Israeli poskim are more stringent. These stocks invest heavily in options, which they consider to be bets on the movement of stocks, as opposed to the stocks themselves. As a said before, this is for each religious investor to discuss with his or her Rabbi.
The general method is a method of investing where the money is put into a single fund that is mostly conservative. This was the default fund in which money is invested if the customer does not specify anything in particular and is usually called the מסלול כללי. While the amounts may vary from year to year, overall these funds invest ~40% in government bonds, ~30% in corporate bonds ~30% in stocks and other investments. (Note: at the beginning of every year, the fund declares the exact way it will invest in the coming year and its margin of error allowed). These funds should bring in somewhere between 7% – 9% on a good year and will lose up to 2% on a bad year. Every single company has a general fund.
In keeping with OECD guidelines as of 2016, pension funds direct their investors into Chilean funds, keeping the general funds only for people who joined previously. In my opinion, this is a good thing and people who are invested in general funds should highly consider switching to another kind of fund that matches their investment needs.
As I stated before, the choice of which fund you want to invest your pension is entirely yours, with the exception of the pitzuyim portion, for which you must get your employer’s permission if you want it in a fund that is not a General Fund of Default Fund (that invests in accordance with ages). Your employer cannot force you to invest with any company or any fund and doing so is illegal. Similarly no insurance agent may insist that everyone join a particular fund and doing so is highly illegal.