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Be true to your long-term investment strategy

Personal Finance

As an investor, you are probably struggling to digest the flow of political and economic developments, both locally and internationally, and have recently had to grapple with the news that South Africa’s gross domestic product contracted 0.7% in the first quarter of this year, which saw the country slip into its second recession in eight years. Add to this the news of the recent Moody’s downgrade of South African debt, and you are probably wondering about the health of your investments.

Dave Mohr, the chief investment strategist at Old Mutual Multi-Managers, offers some insight into the financial landscape investors find themselves inhabiting.

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“After the first bout of ratings downgrades in April, everybody expected two things to happen: the rand would collapse and interest rates would rise. However, we’ve now suffered multiple downgrades, and none of these things has occurred,” Mohr says.

“Suffering a downgrade therefore doesn’t necessarily mean local investment markets will collapse. This is very much dependent on market expectations – a downgrade would have likely already been priced into the markets before it took place – and the broader global circumstances, which are positive for emerging markets. Investors must therefore be careful not to base their investment strategy solely on the effects of a downgrade.”

Francois le Roux, an accredited Certified Financial Planner at Private Wealth Management, a division of Old Mutual Wealth, says all investors have cause to be concerned, but some will be more affected than others. The struggling economy and the downgrades will not affect all investors equally – it depends where you are invested and for how long.

Le Roux says: “Investing is not a one-size-fits-all approach, and a strategy that applies to, say, a younger investor who is sitting on a substantial amount of hard-earned after-tax cash would not apply to a typical retiree.”

Le Roux says if you have a large amount of after-tax cash and want to invest for the long term, you would be ill-advised to keep that money in a low-risk investment, such as a fixed deposit or money-market fund. The same goes for a young working man or woman who is saving for retirement, who may want to know whether he or she is accumulating retirement capital at a steady enough pace.

He says many clients are complaining about the low returns on higher-risk equity-dominated investments, saying their money would be better off in the bank. But long-term investors need to look past the current market malaise, because they have time on their side, and “the one thing we know is that you need to incur risk for inflation-beating results”.

You cannot stay invested in cash for too long, because the “sums simply do not add up”, Le Roux says.

Even if you are in the high-net-worth category, with sufficient put away for your retirement and with money left over, there may still be room for taking on some investment risk, for which your heirs will be grateful.

Pressure on Pensioners

Retirees have the greatest cause for concern in times of market volatility, Le Roux says, worrying about the effects on their retirement capital and ultimately their income.

Pensioners relying on an income from living annuities may have to adjust to the current low-return environment, but must be sure that they don’t derail what may be an investment strategy specifically designed to weather negative market conditions. You must ask yourself, he suggests, whether it is the strategy that’s wrong, or whether it is the markets. Normally, it would be the latter.

A financial planner can help you in this situation by looking at your drawdown strategy.

A so-called dynamic strategy would see you adjusting your drawdown (what you withdraw annually from your savings as income) in line with market conditions, in which case you might have to go without an annual inflation-linked escalation to your income, or even consider tightening your belt and accepting a slight drop in income.

If you are drawing down a realistic 4% to 5% of your retirement capital a year (which could need further adjustment in line with your gender and age, and how much capital you have) and you are invested in a typical balanced retirement portfolio, the consensus opinion is that you are unlikely to suffer capital loss over the long term, Le Roux says. He says further guidance on drawdowns can be taken from the table issued by the Association for Savings & Investment SA, suggesting safe drawdown rates in various scenarios.

But what if there is a further downgrade or markets continue contracting? If the outlook is for ongoing low returns, your planner may have to remodel your investment strategy.

If things start looking really nasty, he says, an option may be to switch a portion or all of your retirement capital to a guaranteed life annuity. This removes the investment risk and guarantees a life-long income, but comes with other restrictions, which calls for input from your planner.

“You, the investor, need to determine what monthly income you require to sustain your standard of living over time. Once you have established a clear income goal, you will appreciate that your capital needs to generate a certain minimum return to fund your lifestyle, corresponding to the investment risk you need to take. You can then be guided in how to construct a portfolio with an appropriate asset allocation to deliver this return over time, using strategies that target a specific return above inflation. Only once an investor has arrived at this point in our advice-led process, can we start looking at the level of investment risk they are prepared to incur and make the necessary adjustments to complete the process.”

While uncertainty in the local environment remains, and emotions run high as a result, Le Roux says that, instead of compounding the problem by considering switching to “safer” investments, you should be clear about your long-term financial strategy and understand what you need to achieve your goals.

“A sound financial planning process can go a long way to bring more certainty to the equation. An accredited financial planner will assist in finding the most appropriate, tailored investment strategy to match your income needs, while also keeping risk tolerance in mind.”

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