Saving for retirement is not as hard as it seems
By Michael Rossouw
These days, every second advertisement – for everything from food to homeware and even the products we use to save our money – espouses the virtues of choice. We’ve become conditioned to believe that choice is always a good thing and that the more choices we have, the better life is. But this isn’t always true.
In the investment and savings world, this equates to fund managers saying there are different strokes for different folks. Yet, time and again, a proliferation of choices also point to the fact that any number of options would be second-best, or worse. This essentially means that what a company is claiming is their best-performing fund for 2021 could potentially be their worst the next year.
With more than 1,500 unit trusts in South Africa alone, how do seasoned fund managers know which to pick? And where does that leave the average man on the street who has no knowledge of investing at all?
Being faced with too much choice can be blinding. It can make us feel ignorant about products that are already quite complex. As consumers, we become alienated from how they work and what they are supposed to do. This makes us, at best, reliant on experts such as advisors and, at worst, completely turned off investing our money for fear of doing it incorrectly.
The result is that many of us outsource our retirement savings plans. This serves the investment industry very well, but investors like you and me? Not so much.
So how do we cut through all the noise and make it easy to invest? By understanding the basics.
Firstly, those 1,500 funds I mentioned earlier – they’re all just variations of portfolios of the same four types of investments: cash, bonds, property and equity.
These can be divided into defensive assets (cash and bonds) and growth assets (property and equity). Defensive assets are generally used for short-term investments as they achieve single-digit returns most of the time and have low volatility (risk). Growth assets are generally used for the long run because, while they achieve double-digit returns most of the time, they tend to experience high volatility in the short run.
It’s important to be diversified across all types of investments as it lowers your risk. The amount you allocate between defensive assets and growth assets will determine if you achieve your investment goal or not. So if you’re investing for the short term, you want to have a higher allocation towards defensive assets, such as cash and bonds, with a smaller allocation towards growth assets for diversification.
If you’re looking to invest for the long term, such as for your retirement, you should have a high allocation towards growth assets like property and equity, with a smaller allocation towards defensive assets for diversification. In this example, if you looked for funds that fit your required allocation, you’d probably find that only about 250 exist within those 1,500 funds I mentioned previously.
The next step is finding a fund that has a long-term track record to match your long-term investment goal. You’ll find that there are only about 70 that have a 10-year track record. You can further sort these funds by looking at their returns over the years, as well as which were the top-performing and lowest-performing funds. But those aren’t the actual returns you’ll receive as you’ll still need to remove costs before you can truly know which funds you should be looking to invest your life savings in. While there tends to be a fraction of a percentage difference between returns of the top 10 funds, there can be a 3% difference in the fee you pay to achieve those returns.
So when deciding how to invest, ask yourself the following questions:
– Is your goal saving for the long- or short-term?
– Which funds are most appropriate to help you achieve this goal?
– Which of the funds you’ve selected have a proven track record in terms of returns?
– What are the fee structures for the funds you’ve identified? If they involve higher fees than other funds, reconsider whether these are suitable for you.
This will help guide you to make the most appropriate investment choice for your life.
Michael Rossouw is a senior investment consultant at 10X Investments